UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
For the quarterly period ended March 31, 2020 .
OR
For the transition period from __________ to __________.
Commission file number 001-13643
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
(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 |
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.
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 April 20, 2020, the Company had 413,907,211 shares of common stock outstanding.
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ONEOK, Inc.
TABLE OF CONTENTS
Page No. | ||
As used in this Quarterly Report, references to “we,” “our” or “us” refer to ONEOK, Inc., an Oklahoma corporation, and its predecessors and subsidiaries, unless the context indicates otherwise.
The statements in this Quarterly Report that are not historical information, including statements concerning plans and objectives of management for future operations, economic performance or related assumptions, are forward-looking statements. Forward-looking statements may include words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “forecast,” “goal,” “guidance,” “intend,” “may,” “might,” “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, Bylaws, Response to COVID-19 and the written charter of our Audit Committee also are available on our website, and we will provide copies of these documents upon request.
In addition to our filings with the SEC and materials posted on our website, we also use social media platforms as additional channels of distribution to reach public investors. Information contained on our website, posted on our social media accounts, and any corresponding applications, are not incorporated by reference into this report.
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GLOSSARY
The abbreviations, acronyms and industry terminology used in this Quarterly Report are defined as follows:
$1.5 Billion Term Loan Agreement | The senior unsecured delayed-draw three-year $1.5 billion term loan agreement dated November 19, 2018 |
$2.5 Billion Credit Agreement | ONEOK’s $2.5 billion revolving credit agreement, as amended |
AFUDC | Allowance for funds used during construction |
Annual Report | Annual Report on Form 10-K for the year ended December 31, 2019 |
ASU | Accounting Standards Update |
Bbl | Barrels, 1 barrel is equivalent to 42 United States gallons |
BBtu/d | Billion British thermal units per day |
Bcf | Billion cubic feet |
Bcf/d | Billion cubic feet per day |
Btu | British thermal unit |
CARES Act | Coronavirus Aid, Relief, and Economic Security Act |
CFTC | U.S. Commodity Futures Trading Commission |
Clean Air Act | Federal Clean Air Act, as amended |
COVID-19 | Coronavirus disease 2019 |
DJ | Denver-Julesburg |
EBITDA | Earnings before interest expense, income taxes, depreciation and amortization |
EPA | United States Environmental Protection Agency |
Exchange Act | Securities Exchange Act of 1934, as amended |
FERC | Federal Energy Regulatory Commission |
GAAP | Accounting principles generally accepted in the United States of America |
Intermediate Partnership | ONEOK Partners Intermediate Limited Partnership, a wholly owned subsidiary of ONEOK Partners, L.P. |
LIBOR | London Interbank Offered Rate |
MBbl/d | Thousand barrels per day |
MDth/d | Thousand dekatherms per day |
MMBbl | Million barrels |
MMBbl/d | Million barrels per day |
MMBtu | Million British thermal units |
MMcf/d | Million cubic feet per day |
Moody’s | Moody’s Investors Service, Inc. |
Natural Gas Act | Natural Gas Act of 1938, as amended |
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. |
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 |
SEC | Securities and Exchange Commission |
Series E Preferred Stock | Series E Non-Voting, Perpetual Preferred Stock, par value $0.01 per share |
STACK | Sooner Trend Anadarko Canadian Kingfisher, an area in the Anadarko Basin in Oklahoma |
West Texas LPG | West Texas LPG pipeline and Mesquite pipeline |
WTI | West Texas Intermediate |
XBRL | eXtensible Business Reporting Language |
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ONEOK, Inc. and Subsidiaries | |||||||
CONSOLIDATED STATEMENTS OF INCOME | |||||||
Three Months Ended | |||||||
March 31, | |||||||
(Unaudited) | 2020 | 2019 | |||||
(Thousands of dollars, except per share amounts) | |||||||
Revenues | |||||||
Commodity sales | $ | $ | |||||
Services | |||||||
Total revenues (Note L) | |||||||
Cost of sales and fuel (exclusive of items shown separately below) | |||||||
Operations and maintenance | |||||||
Depreciation and amortization | |||||||
Impairment charges (Note A) | |||||||
General taxes | |||||||
Gain on sale of assets | ( | ) | ( | ) | |||
Operating income (loss) | ( | ) | |||||
Equity in net earnings from investments (Note I) | |||||||
Impairment of equity investments (Note A) | ( | ) | |||||
Allowance for equity funds used during construction | |||||||
Other income | |||||||
Other expense | ( | ) | ( | ) | |||
Interest expense (net of capitalized interest of $30,875 and $19,192, respectively) | ( | ) | ( | ) | |||
Income (loss) before income taxes | ( | ) | |||||
Income tax (expense) benefit | ( | ) | |||||
Net income (loss) | ( | ) | |||||
Less: Preferred stock dividends | |||||||
Net income (loss) available to common shareholders | $ | ( | ) | $ | |||
Basic earnings (loss) per common share (Note G) | $ | ( | ) | $ | |||
Diluted earnings (loss) per common share (Note G) | $ | ( | ) | $ | |||
Average shares (thousands) | |||||||
Basic | |||||||
Diluted | |||||||
See accompanying Notes to Consolidated Financial Statements.
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ONEOK, Inc. and Subsidiaries | |||||||
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME | |||||||
Three Months Ended | |||||||
March 31, | |||||||
(Unaudited) | 2020 | 2019 | |||||
(Thousands of dollars) | |||||||
Net income (loss) | $ | ( | ) | $ | |||
Other comprehensive income (loss), net of tax | |||||||
Change in fair value of derivatives, net of tax of $31,705 and $20,593, respectively | ( | ) | ( | ) | |||
Derivative amounts reclassified to net income (loss), net of tax of $4,518 and $4,177, respectively | ( | ) | ( | ) | |||
Change in retirement and other postretirement benefit plan obligations, net of tax of $(1,064) and $(699), respectively | |||||||
Other comprehensive income (loss) of unconsolidated affiliates, net of tax of $2,283 and $750, respectively | ( | ) | ( | ) | |||
Total other comprehensive income (loss), net of tax | ( | ) | ( | ) | |||
Comprehensive income (loss) | $ | ( | ) | $ | |||
See accompanying Notes to Consolidated Financial Statements.
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ONEOK, Inc. and Subsidiaries | ||||||||
CONSOLIDATED BALANCE SHEETS | ||||||||
March 31, | December 31, | |||||||
(Unaudited) | 2020 | 2019 | ||||||
Assets | (Thousands of dollars) | |||||||
Current assets | ||||||||
Cash and cash equivalents | $ | $ | ||||||
Accounts receivable, net | ||||||||
Materials and supplies | ||||||||
NGLs and natural gas in storage | ||||||||
Commodity imbalances | ||||||||
Other current assets | ||||||||
Total current assets | ||||||||
Property, plant and equipment | ||||||||
Property, plant and equipment | ||||||||
Accumulated depreciation and amortization | ||||||||
Net property, plant and equipment | ||||||||
Investments and other assets | ||||||||
Investments in unconsolidated affiliates (Note A) | ||||||||
Goodwill and intangible assets (Note A) | ||||||||
Other assets | ||||||||
Total investments and other assets | ||||||||
Total assets | $ | $ | ||||||
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ONEOK, Inc. and Subsidiaries | ||||||||
CONSOLIDATED BALANCE SHEETS | ||||||||
(Continued) | ||||||||
March 31, | December 31, | |||||||
(Unaudited) | 2020 | 2019 | ||||||
Liabilities and equity | (Thousands of dollars) | |||||||
Current liabilities | ||||||||
Current maturities of long-term debt (Note D) | $ | $ | ||||||
Short-term borrowings (Note D) | ||||||||
Accounts payable | ||||||||
Commodity imbalances | ||||||||
Accrued taxes | ||||||||
Accrued interest | ||||||||
Operating lease liability (Note K) | ||||||||
Other current liabilities | ||||||||
Total current liabilities | ||||||||
Long-term debt, excluding current maturities (Note D) | ||||||||
Deferred credits and other liabilities | ||||||||
Deferred income taxes | ||||||||
Operating lease liability (Note K) | ||||||||
Other deferred credits | ||||||||
Total deferred credits and other liabilities | ||||||||
Commitments and contingencies (Note J) | ||||||||
Equity (Note E) | ||||||||
ONEOK shareholders’ equity: | ||||||||
Preferred stock, $0.01 par value: authorized and issued 20,000 shares at March 31, 2020, and December 31, 2019 | ||||||||
Common stock, $0.01 par value: authorized 1,200,000,000 shares, issued 445,016,234 shares and outstanding 413,882,720 shares at March 31, 2020; issued 445,016,234 shares and outstanding 413,239,050 shares at December 31, 2019 | ||||||||
Paid-in capital | ||||||||
Accumulated other comprehensive loss (Note F) | ( | ) | ( | ) | ||||
Retained earnings (accumulated deficit) | ( | ) | ||||||
Treasury stock, at cost: 31,133,514 shares at March 31, 2020, and 31,777,184 shares at December 31, 2019 | ( | ) | ( | ) | ||||
Total equity | ||||||||
Total liabilities and equity | $ | $ | ||||||
See accompanying Notes to Consolidated Financial Statements.
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ONEOK, Inc. and Subsidiaries | ||||||||
CONSOLIDATED STATEMENTS OF CASH FLOWS | ||||||||
Three Months Ended | ||||||||
March 31, | ||||||||
(Unaudited) | 2020 | 2019 | ||||||
(Thousands of dollars) | ||||||||
Operating activities | ||||||||
Net income (loss) | $ | ( | ) | $ | ||||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||
Depreciation and amortization | ||||||||
Impairment charges | ||||||||
Equity in net earnings from investments | ( | ) | ( | ) | ||||
Distributions received from unconsolidated affiliates | ||||||||
Deferred income tax expense (benefit) | ( | ) | ||||||
Other, net | ( | ) | ( | ) | ||||
Changes in assets and liabilities: | ||||||||
Accounts receivable | ||||||||
NGLs and natural gas in storage | ||||||||
Accounts payable | ( | ) | ( | ) | ||||
Accrued interest | ( | ) | ( | ) | ||||
Risk-management assets and liabilities | ( | ) | ||||||
Other assets and liabilities, net | ( | ) | ( | ) | ||||
Cash provided by operating activities | ||||||||
Investing activities | ||||||||
Capital expenditures (less allowance for equity funds used during construction) | ( | ) | ( | ) | ||||
Distributions received from unconsolidated affiliates in excess of cumulative earnings | ||||||||
Other, net | ( | ) | ||||||
Cash used in investing activities | ( | ) | ( | ) | ||||
Financing activities | ||||||||
Dividends paid | ( | ) | ( | ) | ||||
Repayment of short-term borrowings, net | ( | ) | ||||||
Issuance of long-term debt, net of discounts | ||||||||
Debt financing costs | ( | ) | ( | ) | ||||
Repayment of long-term debt | ( | ) | ( | ) | ||||
Other, net | ( | ) | ( | ) | ||||
Cash provided by financing activities | ||||||||
Change in cash and cash equivalents | ||||||||
Cash and cash equivalents at beginning of period | ||||||||
Cash and cash equivalents at end of period | $ | $ | ||||||
See accompanying Notes to Consolidated Financial Statements.
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ONEOK, Inc. and Subsidiaries | ||||||||||||||||||
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY | ||||||||||||||||||
(Unaudited) | Common Stock Issued | Preferred Stock Issued | Common Stock | Preferred Stock | Paid-in Capital | |||||||||||||
(Shares) | (Thousands of dollars) | |||||||||||||||||
January 1, 2020 | $ | $ | $ | |||||||||||||||
Net loss | — | — | ||||||||||||||||
Other comprehensive loss (Note F) | — | — | ||||||||||||||||
Preferred stock dividends - $13.75 per share (Note E) | — | — | ( | ) | ||||||||||||||
Common stock issued | — | ( | ) | |||||||||||||||
Common stock dividends - $0.935 per share (Note E) | — | — | ( | ) | ||||||||||||||
Other, net | — | — | ( | ) | ||||||||||||||
March 31, 2020 | $ | $ | $ | |||||||||||||||
(Unaudited) | Common Stock Issued | Preferred Stock Issued | Common Stock | Preferred Stock | Paid-in Capital | |||||||||||||
(Shares) | (Thousands of dollars) | |||||||||||||||||
January 1, 2019 | $ | $ | $ | |||||||||||||||
Cumulative effect adjustment for adoption of ASU 2016-02, “Leases (Topic 842)” | — | — | ||||||||||||||||
Net income | — | — | ||||||||||||||||
Other comprehensive loss | — | — | ||||||||||||||||
Preferred stock dividends - $13.75 per share | — | — | ||||||||||||||||
Common stock issued | — | — | ( | ) | ||||||||||||||
Common stock dividends - $0.86 per share | — | — | ( | ) | ||||||||||||||
Other, net | — | — | ( | ) | ||||||||||||||
March 31, 2019 | $ | $ | $ | |||||||||||||||
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ONEOK, Inc. and Subsidiaries | ||||||||||||||||
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (Continued) | ||||||||||||||||
(Unaudited) | Accumulated Other Comprehensive Loss | Retained Earnings (Accumulated Deficit) | Treasury Stock | Total Equity | ||||||||||||
(Thousands of dollars) | ||||||||||||||||
January 1, 2020 | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
Net loss | ( | ) | ( | ) | ||||||||||||
Other comprehensive loss (Note F) | ( | ) | ( | ) | ||||||||||||
Preferred stock dividends - $13.75 per share (Note E) | ( | ) | ||||||||||||||
Common stock issued | ||||||||||||||||
Common stock dividends - $0.935 per share (Note E) | ( | ) | ||||||||||||||
Other, net | ( | ) | ||||||||||||||
March 31, 2020 | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||
(Unaudited) | Accumulated Other Comprehensive Loss | Retained Earnings (Accumulated Deficit) | Treasury Stock | Total Equity | ||||||||||||
(Thousands of dollars) | ||||||||||||||||
January 1, 2019 | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
Cumulative effect adjustment for adoption of ASU 2016-02, “Leases (Topic 842)” | ( | ) | ( | ) | ||||||||||||
Net income | ||||||||||||||||
Other comprehensive loss | ( | ) | ( | ) | ||||||||||||
Preferred stock dividends - $13.75 per share | ( | ) | ( | ) | ||||||||||||
Common stock issued | ||||||||||||||||
Common stock dividends - $0.86 per share | ( | ) | ( | ) | ||||||||||||
Other, net | ( | ) | ||||||||||||||
March 31, 2019 | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
See accompanying Notes to Consolidated Financial Statements.
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ONEOK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Our accompanying unaudited Consolidated Financial Statements have been prepared pursuant to the rules and regulations of the SEC. These statements have been prepared in accordance with GAAP and reflect all adjustments that, in our opinion, are necessary for a fair statement of the results for the interim periods presented. All such adjustments are of a normal recurring nature. The 2019 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.
In March 2020, the CARES Act was signed into law in response to the COVID-19 pandemic, and we opted into the CARES Act 401(k) hardship withdrawal and loan deferral programs for employees. While this legislation includes tax provisions that will modestly benefit us, we do not expect the CARES Act to materially impact us.
Impairment Charges - Late in the first quarter 2020, we experienced a significant decline in our share price and market capitalization as the energy industry experienced historic events that led to a simultaneous demand and supply shock. The World Health Organization declared the novel strain of COVID-19 a global pandemic and recommended containment and mitigation measures worldwide, which contributed to a massive economic slowdown and decreased demand for crude oil. In addition, Saudi Arabia and Russia increased production of crude oil as the two countries competed for market share. As a result, the global supply of crude oil significantly exceeded demand and led to a collapse in crude oil prices. Despite recently announced production cuts from many oil producing countries, supply exceeds demand, crude oil storage is near capacity and prices remain volatile. The collapse in crude oil prices and demand for energy commodities have also contributed to lower NGL product prices and lower natural gas prices, which is creating challenges for crude oil and natural gas producers as they assess their future drilling and production plans. Based on these events, we performed a Step 1 analysis to test our goodwill for impairment and evaluated certain long-lived asset groups and equity investments for impairment.
Goodwill - We assess our goodwill for impairment at least annually on July 1, unless events or changes in circumstances indicate an impairment may have occurred before that time. In the Step 1 analysis, an assessment is made by comparing the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying value of a reporting unit exceeds its fair value, an impairment loss is recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. In January 2020, we adopted ASU 2017-04, in which the requirement to calculate the implied fair value of goodwill under the two-step impairment test was eliminated.
To estimate the fair value of our reporting units, we use two generally accepted valuation approaches, an income approach and a market approach, using assumptions consistent with a market participant’s perspective. Under the income approach, we use anticipated cash flows over a period of years plus a terminal value and discount these amounts to their present value using appropriate discount rates. Under the market approach, we apply EBITDA multiples to forecasted EBITDA. The multiples used are consistent with historical asset transactions. The forecasted cash flows are based on average forecasted cash flows for a reporting unit over a period of years.
Based on the results of our impairment test, we concluded the carrying value of the Natural Gas Gathering and Processing reporting unit exceeded its estimated fair value, resulting in a noncash impairment charge of $153.4 million for the three months ended March 31, 2020, which is included within impairment charges in our Consolidated Statement of Income. The estimated fair value of our Natural Gas Liquids and Natural Gas Pipelines reporting units substantially exceeded their respective carrying values.
The following table sets forth our goodwill, by segment, for the periods indicated:
March 31, 2020 | December 31, 2019 | |||||||
(Thousands of dollars) | ||||||||
Natural Gas Gathering and Processing | $ | $ | ||||||
Natural Gas Liquids | ||||||||
Natural Gas Pipelines | ||||||||
Total goodwill | $ | $ | ||||||
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Long-lived assets - We assess our long-lived assets for impairment whenever events or changes in circumstances indicate that an asset’s carrying amount may not be recoverable. An impairment is indicated if the carrying amount of a long-lived asset exceeds the sum of the undiscounted future cash flows expected to result from the use and eventual disposition of the asset. If an impairment is indicated, we record an impairment loss equal to the difference between the carrying value and the fair value of the long-lived asset.
We evaluated our Natural Gas Gathering and Processing segment asset groups and determined that the carrying value of certain long-lived asset groups in western Oklahoma, Kansas and the Powder River Basin, where lower pricing is expected to impact drilling and production levels, are not recoverable and exceeded their estimated fair value. We recorded noncash impairment charges of $380.5 million for the three months ended March 31, 2020, which includes impairment to intangible assets of $19.9 million related to supply contracts. In our Natural Gas Liquids segment, we recorded noncash impairment charges of $70.2 million for the three months ended March 31, 2020, related to certain inactive assets, as our expectation for future use of the assets changed. These charges are included within impairment charges in our Consolidated Statement of Income.
Investments in unconsolidated affiliates - The impairment test for equity-method investments considers whether the fair value of the equity investment as a whole, not the underlying net assets, has declined and whether that decline is other than temporary. Therefore, we periodically evaluate the amount at which we carry our equity-method investments to determine whether current events or circumstances warrant adjustments to our carrying values.
We evaluated our investments in unconsolidated affiliates and concluded that the carrying value of our 10.2 % investment in Venice Energy Services Company in our Natural Gas Gathering and Processing segment exceeded its estimated fair value, resulting in a noncash impairment charge of $30.5 million for the three months ended March 31, 2020, which includes an impairment to our equity-method goodwill of $22.3 million. We also concluded that the carrying value of our 50 % investment in Chisholm Pipeline Company in our Natural Gas Liquids segment exceeded its estimated fair value, resulting in a noncash impairment charge of $7.2 million for the three months ended March 31, 2020. These impairment charges are included within impairment of equity investments in our Consolidated Statement of Income.
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Recently Issued Accounting Standards Update - Changes to GAAP are established by the Financial Accounting Standards Board (FASB) in the form of ASUs to the FASB Accounting Standards Codification. We consider the applicability and impact of all ASUs. ASUs not listed below or in our Annual Report were assessed and determined to be either not applicable or clarifications of ASUs previously issued or listed below. Except as discussed below or in our Annual Report, there have been no new accounting pronouncements that have become effective or have been issued that are of significance or potential significance to us. The following table provides a brief description of recently adopted accounting pronouncements and our analysis of the effects on our financial statements:
Standard | Description | Date of Adoption | Effect on the Financial Statements or Other Significant Matters | |||
ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” | The standard requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented net of the allowance for credit losses to reflect the net carrying value at the amount expected to be collected on the financial asset; and the initial allowance for credit losses for purchased financial assets, including available-for-sale debt securities, to be added to the purchase price rather than being reported as a credit loss expense. | First quarter 2020 | The impact of adopting this standard was not material. | |||
ASU 2017-04, “Intangibles- Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment” | The standard simplifies the subsequent measurement of goodwill by eliminating the requirement to calculate the implied fair value of goodwill under step 2. Instead, an entity will recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. The standard does not change step zero or step 1 assessments. | First quarter 2020 | We adopted and implemented this standard to record noncash impairment charges related to our goodwill, as described above. | |||
ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting” | The standard provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. | First quarter 2020 | The impact of adopting this standard was not material. | |||
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 Intercontinental Exchange (ICE) clearing broker account with daily margin requirements. We validate our valuation inputs with third-party information and settlement prices from other sources, where available.
We compute the fair value of our derivative portfolio by discounting the projected future cash flows from our derivative assets and liabilities to present value using interest-rate yields to calculate present-value discount factors derived from the implied forward LIBOR yield curve. The fair value of our forward-starting interest-rate swaps is determined using financial models that incorporate the implied forward LIBOR yield curve for the same period as the future interest-rate swap settlements. We consider current market data in evaluating counterparties’, as well as our own, nonperformance risk, net of collateral, by using counterparty-specific bond yields. Although we use our best estimates to determine the fair value of the derivative contracts we have executed, the ultimate market prices realized could differ materially from our estimates.
Fair Value Hierarchy - At each balance sheet date, we utilize a fair value hierarchy to classify fair value amounts recognized or disclosed in our financial statements based on the observability of inputs used to estimate such fair value. The levels of the hierarchy are described below:
• | Level 1 - fair value measurements are based on unadjusted quoted prices for identical securities in active markets. These balances are composed predominantly of exchange-traded derivative contracts for natural gas and crude oil. |
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• | Level 2 - fair value measurements are based on significant observable pricing inputs, including quoted prices for similar assets and liabilities in active markets and inputs from third-party pricing services supported with corroborative evidence. These balances are composed of over-the-counter interest-rate derivatives. |
• | Level 3 - fair value measurements are based on inputs that may include one or more unobservable inputs, including internally developed 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 and natural gas basis risk between various transaction locations and the NYMEX Henry Hub. Our commodity derivatives are generally valued using forward quotes provided by third-party pricing services that are validated with other market data. We believe any measurement uncertainty at March 31, 2020, is immaterial as our Level 3 fair value measurements are based on unadjusted pricing information from broker quotes and third-party pricing services. We do not believe that our Level 3 fair value estimates have a material impact on our results of operations, as our derivatives are accounted for as hedges. |
Determining the appropriate classification of our fair value measurements within the fair value hierarchy requires management’s judgment regarding the degree to which market data is observable or corroborated by observable market data. We categorize derivatives for which fair value is determined using multiple inputs within a single level, based on the lowest level input that is significant to the fair value measurement in its entirety.
Recurring Fair Value Measurements - The following tables set forth our recurring fair value measurements for the periods indicated:
March 31, 2020 | |||||||||||||||||||||||
Level 1 | Level 2 | Level 3 | Total - Gross | Netting (a) | Total - Net | ||||||||||||||||||
(Thousands of dollars) | |||||||||||||||||||||||
Derivative assets | |||||||||||||||||||||||
Commodity contracts | |||||||||||||||||||||||
Financial contracts | $ | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||
Total derivative assets | $ | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||
Derivative liabilities | |||||||||||||||||||||||
Commodity contracts | |||||||||||||||||||||||
Financial contracts | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||
Interest-rate contracts | ( | ) | ( | ) | ( | ) | |||||||||||||||||
Total derivative liabilities | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | |||||||
(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 March 31, 2020, we posted no cash and held cash of $66.9 million from various counterparties, which offsets our derivative net asset position under master netting arrangements as shown in the table above.
December 31, 2019 | |||||||||||||||||||||||
Level 1 | Level 2 | Level 3 | Total - Gross | Netting (a) | Total - Net | ||||||||||||||||||
(Thousands of dollars) | |||||||||||||||||||||||
Derivative assets | |||||||||||||||||||||||
Commodity contracts | |||||||||||||||||||||||
Financial contracts | $ | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||
Interest-rate contracts | |||||||||||||||||||||||
Total derivative assets | $ | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||
Derivative liabilities | |||||||||||||||||||||||
Commodity contracts | |||||||||||||||||||||||
Financial contracts | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | |||||||||
Interest-rate contracts | ( | ) | ( | ) | ( | ) | |||||||||||||||||
Total derivative liabilities | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | |||||||
(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, 2019, we held no cash and posted $8.8 million of cash with various counterparties, which is included in other current assets in our Consolidated Balance Sheet.
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The following table sets forth a reconciliation of our Level 3 fair value measurements for the periods indicated:
Three Months Ended | |||||||
March 31, | |||||||
Derivative Assets (Liabilities) | 2020 | 2019 | |||||
(Thousands of dollars) | |||||||
Net assets at beginning of period | $ | $ | |||||
Total changes in fair value: | |||||||
Settlements included in net income (loss) (a) | ( | ) | ( | ) | |||
New Level 3 derivatives included in other comprehensive income (loss) (b) | |||||||
Unrealized change included in other comprehensive income (loss) (b) | ( | ) | |||||
Net assets at end of period | $ | $ | |||||
(a) - Included in commodity sales revenues/cost of sales and fuel in our Consolidated Statements of Income.
During the three months ended March 31, 2020 and 2019, there were no transfers in or out of Level 3 of the fair value hierarchy.
Other Financial Instruments - The approximate fair value of cash and cash equivalents, accounts receivable, accounts payable and short-term borrowings is equal to book value due to the short-term nature of these items. Our cash and cash equivalents are composed of bank and money market accounts and are classified as Level 1. Our short-term borrowings are classified as Level 2 since the estimated fair value of the short-term borrowings can be determined using information available in the commercial paper market.
The estimated fair value of our consolidated long-term debt, including current maturities, was $11.9 billion and $13.8 billion at March 31, 2020, and December 31, 2019, respectively. The book value of our consolidated long-term debt, including current maturities, was $14.2 billion and $12.5 billion at March 31, 2020, and December 31, 2019, respectively. The estimated fair value of the aggregate long-term debt outstanding was determined using quoted market prices for similar issues with similar terms and maturities. The estimated fair value of our consolidated long-term debt is classified as Level 2.
Nonrecurring Fair Value Measurements - During the three months ended March 31, 2020, we recorded noncash impairment charges for certain long-lived assets and equity investments. The valuation of these assets and investments required the use of significant unobservable inputs. To estimate the fair value, we used two generally accepted valuation approaches, an income approach and a market approach. Under the income approach, our discounted cash flow analysis included the following inputs that are not readily available: a discount rate reflective of industry cost of capital, our estimated contract rates, volumes, operating and maintenance costs and capital expenditures. Under the market approach, our inputs included EBITDA multiples and forecasted EBITDA, which was estimated using commodity price forecasts consistent with third-party pricing services. The estimated fair value of these assets is classified as Level 3. See Note A for additional information about our impairment charges.
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; |
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• | Forward contracts - Nonstandardized commitments between two parties to purchase or sell natural gas, crude oil or NGLs for future physical delivery. These contracts are typically nontransferable and can only be canceled with the consent of both parties; |
• | Swaps - Exchange of one or more payments based on the value of one or more commodities. These instruments transfer the financial risk associated with a future change in value between the counterparties of the transaction, without also conveying ownership interest in the asset or liability; and |
• | Options - Contractual agreements that give the holder the right, but not the obligation, to buy or sell a fixed quantity of a commodity at a fixed price within a specified period of time. Options may either be standardized and exchange-traded or customized and nonexchange-traded. |
We may also use other instruments including collars to mitigate commodity price risk. A collar is a combination of a purchased put option and a sold call option, which places a floor and a ceiling price for commodity sales being hedged.
In our Natural Gas Gathering and Processing segment, we are exposed to commodity price risk as a result of retaining a portion of the commodity sales proceeds associated with our POP with fee contracts. Under certain POP with fee contracts, our fees and POP percentage may increase or decrease if production volumes, delivery pressures or commodity prices change relative to specified thresholds. We also are exposed to basis risk between the various production and market locations where we buy and sell commodities. As part of our hedging strategy, we use the previously described commodity derivative financial instruments and physical-forward contracts to reduce the impact of price fluctuations related to natural gas, NGLs and condensate.
In our Natural Gas Liquids segment, we are primarily exposed to commodity price risk resulting from the relative values of the various NGL products to each other, the value of NGLs in storage and the relative value of NGLs to natural gas. We are also exposed to location price differential risk as a result of the relative value of NGL purchases at one location and sales at another location, primarily related to our optimization and marketing activities. As part of our hedging strategy, we utilize physical-forward contracts and commodity derivative financial instruments to reduce the impact of price fluctuations related to NGLs.
In our Natural Gas Pipelines segment, we are 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 from inventory, which can expose this segment to commodity price risk depending on the regulatory treatment for this activity. To the extent that commodity price risk in our Natural Gas Pipelines segment is not mitigated by fuel cost-recovery mechanisms, we may use physical-forward sales or purchases to reduce the impact of natural gas price fluctuations. At March 31, 2020, and December 31, 2019, there were no financial derivative instruments with respect to our natural gas pipeline operations.
Interest-rate risk - We manage interest-rate risk through the use of fixed-rate debt, floating-rate debt and interest-rate swaps. Interest-rate swaps are agreements to exchange interest payments at some future point based on specified notional amounts. In March 2020, we settled $750 million of our forward-starting interest-rate swaps related to our underwritten public offerings of $1.75 billion senior unsecured notes.
At March 31, 2020, and December 31, 2019, we had forward-starting interest-rate swaps with notional amounts totaling $1.1 billion and $1.8 billion, respectively, to hedge the variability of interest payments on a portion of our forecasted debt issuances. At March 31, 2020, and December 31, 2019, we had interest-rate swaps with notional amounts totaling $1.3 billion to hedge the variability of our LIBOR-based interest payments. All of our interest-rate swaps are designated as cash flow hedges.
Accounting Treatment - Our accounting treatment of derivative instruments is consistent with that disclosed in Note A of the Notes to Consolidated Financial Statements in our Annual Report.
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Fair Values of Derivative Instruments - All derivatives measured at fair value at March 31, 2020, and December 31, 2019, were designated as hedging instruments. See Note B for a discussion of the inputs associated with our fair value measurements. The following table sets forth the fair values of our derivative instruments presented on a gross basis for the periods indicated:
March 31, 2020 | December 31, 2019 | ||||||||||||||||
Location in our Consolidated Balance Sheets | Assets | (Liabilities) | Assets | (Liabilities) | |||||||||||||
(Thousands of dollars) | |||||||||||||||||
Commodity contracts (a) | |||||||||||||||||
Financial contracts | Other current assets | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
Other deferred credits | ( | ) | |||||||||||||||
Interest-rate contracts | Other current liabilities | ( | ) | ( | ) | ||||||||||||
Other assets/other deferred credits | ( | ) | ( | ) | |||||||||||||
Total derivative instruments | $ | $ | ( | ) | $ | $ | ( | ) | |||||||||
(a) - Derivative assets and liabilities are presented in our Consolidated Balance Sheets on a net basis when a legally enforceable master-netting arrangement exists between the counterparty to a derivative contract and us.
Notional Quantities for Derivative Instruments - The following table sets forth the notional quantities for derivative instruments held for the periods indicated:
March 31, 2020 | December 31, 2019 | |||||||||||||||
Contract Type | Purchased/ Payor | Sold/ Receiver | Purchased/ Payor | Sold/ Receiver | ||||||||||||
Cash flow hedges | ||||||||||||||||
Fixed price | ||||||||||||||||
- Natural gas (Bcf) | Futures and swaps | ( | ) | ( | ) | |||||||||||
- Crude oil and NGLs (MMBbl) | Futures, forwards and swaps | ( | ) | ( | ) | |||||||||||
Basis | ||||||||||||||||
- Natural gas (Bcf) | Futures and swaps | ( | ) | ( | ) | |||||||||||
Interest-rate contracts (Billions of dollars) | Swaps | $ | $ | $ | $ | |||||||||||
These notional amounts are used to summarize the volume of financial instruments; however, they do not reflect the extent to which the positions offset one another and, consequently, do not reflect our actual exposure to market or credit risk.
Cash Flow Hedges - The following table sets forth the unrealized change in fair value of cash flow hedges in other comprehensive income (loss) for the periods indicated:
Three Months Ended | |||||||
March 31, | |||||||
2020 | 2019 | ||||||
(Thousands of dollars) | |||||||
Commodity contracts | $ | $ | ( | ) | |||
Interest-rate contracts | ( | ) | ( | ) | |||
Total unrealized change in fair value of cash flow hedges in other comprehensive income (loss) | $ | ( | ) | $ | ( | ) | |
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The following table sets forth the effect of cash flow hedges on net income (loss) for the periods indicated:
Location of Gain (Loss) Reclassified from Accumulated Other Comprehensive Loss into Net Income (Loss) | Three Months Ended | |||||||
March 31, | ||||||||
2020 | 2019 | |||||||
(Thousands of dollars) | ||||||||
Commodity contracts | Commodity sales revenues | $ | $ | |||||
Cost of sales and fuel | ( | ) | ( | ) | ||||
Interest-rate contracts | Interest expense | ( | ) | ( | ) | |||
Total change in fair value of cash flow hedges reclassified from accumulated other comprehensive loss into net income (loss) on derivatives | $ | $ | ||||||
Credit Risk - We monitor the creditworthiness of our counterparties and compliance with policies and limits established by our Risk Oversight and Strategy Committee. We maintain credit policies with regard to our counterparties that we believe minimize overall credit risk. These policies include an evaluation of potential counterparties’ financial condition (including credit ratings, bond yields and credit default swap rates), collateral requirements under certain circumstances and the use of standardized master-netting agreements that allow us to net the positive and negative exposures associated with a single counterparty. We use internally developed credit ratings for counterparties that do not have a credit rating.
Our financial commodity derivatives are generally settled through a NYMEX or Intercontinental Exchange (ICE) clearing broker account with daily margin requirements. However, we may enter into financial derivative instruments that contain provisions that require us to maintain an investment-grade credit rating from S&P and/or Moody’s. If our credit ratings on our senior unsecured long-term debt were to decline below investment grade, the counterparties to the derivative instruments could request collateralization on derivative instruments in net liability positions. There were no financial derivative instruments with contingent features related to credit risk at March 31, 2020.
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 March 31, 2020, 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:
March 31, 2020 | December 31, 2019 | |||||||
(Thousands of dollars) | ||||||||
Commercial paper outstanding, bearing a weighted-average interest rate of 2.16% as of December 31, 2019 | $ | $ | ||||||
Senior unsecured obligations: | ||||||||
$1,500,000 term loan, variable rate, due November 2021 | ||||||||
$700,000 at 4.25% due February 2022 | ||||||||
$900,000 at 3.375% due October 2022 | ||||||||
$425,000 at 5.0% due September 2023 | ||||||||
$500,000 at 7.5% due September 2023 | ||||||||
$500,000 at 2.75% due September 2024 | ||||||||
$500,000 at 4.9% due March 2025 | ||||||||
$400,000 at 2.2% due September 2025 | ||||||||
$500,000 at 4.0% due July 2027 | ||||||||
$800,000 at 4.55% due July 2028 | ||||||||
$100,000 at 6.875% due September 2028 | ||||||||
$700,000 at 4.35% due March 2029 | ||||||||
$750,000 at 3.4% due September 2029 | ||||||||
$850,000 at 3.1% due March 2030 | ||||||||
$400,000 at 6.0% due June 2035 | ||||||||
$600,000 at 6.65% due October 2036 | ||||||||
$600,000 at 6.85% due October 2037 | ||||||||
$650,000 at 6.125% due February 2041 | ||||||||
$400,000 at 6.2% due September 2043 | ||||||||
$700,000 at 4.95% due July 2047 | ||||||||
$1,000,000 at 5.2% due July 2048 | ||||||||
$750,000 at 4.45% due September 2049 | ||||||||
$500,000 at 4.5% due March 2050 | ||||||||
Guardian Pipeline | ||||||||
Weighted average 7.85% due December 2022 | ||||||||
Total debt | ||||||||
Unamortized portion of terminated swaps | ||||||||
Unamortized debt issuance costs and discounts | ( | ) | ( | ) | ||||
Current maturities of long-term debt | ( | ) | ( | ) | ||||
Short-term borrowings (a) | ( | ) | ||||||
Long-term debt | $ | $ | ||||||
(a) - Individual issuances of commercial paper under our commercial paper program generally mature in 90 days or less.
$2.5 Billion Credit Agreement - Our $2.5 Billion Credit Agreement is a revolving credit facility and contains certain financial, operational and legal covenants. Among other things, these covenants include maintaining a ratio of indebtedness to adjusted EBITDA (EBITDA, as defined in our $2.5 Billion Credit Agreement, adjusted for all noncash charges and increased for projected EBITDA from certain lender-approved capital expansion projects) of no more than 5.0 to 1 at March 31, 2020. At March 31, 2020, we had no borrowings outstanding, our ratio of indebtedness to adjusted EBITDA was 4.5 to 1, and we were in compliance with all covenants under our $2.5 Billion Credit Agreement.
Debt Issuances - In early March 2020, we completed an underwritten public offering of $1.75 billion senior unsecured notes consisting of $400 million, 2.2 % senior notes due 2025; $850 million, 3.1 % senior notes due 2030; and $500 million, 4.5 % senior notes due 2050. The net proceeds, after deducting underwriting discounts, commissions and offering expenses, were $1.73 billion. A portion of the proceeds were used to pay all outstanding amounts under our commercial paper program. The remainder was, and will be, used for general corporate purposes, which may include repayment of other existing indebtedness and funding capital expenditures.
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Debt Repayments - In March 2020, we repurchased in the open market $67.0 million outstanding principal of certain of our senior notes for an aggregate repurchase price of $50.5 million with cash on hand. In connection with these open market repurchases, we recognized a $15.8 million gain on extinguishment of debt, which is included in other income in our Consolidated Statement of Income for the three months ended March 31, 2020.
Debt Guarantees - We, ONEOK Partners and the Intermediate Partnership have cross guarantees in place for our and ONEOK Partners’ indebtedness.
For additional discussion of our $2.5 Billion Credit Agreement and our $1.5 Billion Term Loan Agreement, see Note F of the Notes to Consolidated Financial Statements in our Annual Report.
E. | EQUITY |
Dividends - Holders of our common stock share equally in any dividend declared by our Board of Directors, subject to the rights of the holders of outstanding preferred stock. Dividends paid on our common stock in February 2020 were $0.935 per share. A dividend of $0.935 per share was declared for shareholders of record at the close of business on April 27, 2020 , payable May 14, 2020 .
The Series E Preferred Stock pays quarterly dividends on each share of Series E Preferred Stock, when, as and if declared by our Board of Directors, at a rate of 5.5 % per year. We paid dividends for the Series E Preferred Stock of $0.3 million in February 2020. Dividends totaling $0.3 million were declared for the Series E Preferred Stock and are payable May 14, 2020 .
F. | ACCUMULATED OTHER COMPREHENSIVE LOSS |
The following table sets forth the balance in accumulated other comprehensive loss for the period indicated:
Risk- Management Assets/Liabilities (a) | Retirement and Other Postretirement Benefit Plan Obligations (a) (b) | Risk- Management Assets/Liabilities of Unconsolidated Affiliates (a) | Accumulated Other Comprehensive Loss (a) | |||||||||||||
(Thousands of dollars) | ||||||||||||||||
January 1, 2020 | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
Other comprehensive income (loss) before reclassifications | ( | ) | ( | ) | ( | ) | ||||||||||
Amounts reclassified to net income (loss) (c) | ( | ) | ( | ) | ||||||||||||
Other comprehensive income (loss) | ( | ) | ( | ) | ( | ) | ||||||||||
March 31, 2020 | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
(a) - All amounts are presented net of tax.
(b) - Includes amounts related to supplemental executive retirement plan.
(c) - See Note C for details of amounts reclassified to net income (loss) for risk-management assets/liabilities and Note H for retirement and other postretirement benefit plan obligations.
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The following table sets forth information about the balance of accumulated other comprehensive loss at March 31, 2020, representing unrealized gains (losses) related to risk-management assets and liabilities:
Risk- Management Assets/Liabilities (a) | ||||
(Thousands of dollars) | ||||
Commodity derivative instruments expected to be realized within the next 21 months (b) | $ | |||
Settled interest-rate swaps to be recognized over the life of the long-term, fixed-rate debt (c) | ( | ) | ||
Interest-rate swaps with future settlement dates expected to be amortized over the life of long-term debt | ( | ) | ||
Accumulated other comprehensive loss at March 31, 2020 | $ | ( | ) | |
(a) - All amounts are presented net of tax.
(b) - Based on March 31, 2020, commodity prices, we expect to realize $73.0 million in net gains, net of tax, over the next 12 months and $0.8 million in net losses, net of tax, thereafter.
(c) - We expect losses of $29.4 million, net of tax, will be reclassified into earnings during the next 12 months as the hedged items affect earnings.
The remaining amounts in accumulated other comprehensive loss relate primarily to our retirement and other postretirement benefit plan obligations, which are expected to be amortized over the average remaining service period of employees participating in these plans.
G. | EARNINGS PER SHARE |
The following tables set forth the computation of basic and diluted EPS for the periods indicated:
Three Months Ended March 31, 2020 | ||||||||||
Income (Loss) | Shares | Per Share Amount | ||||||||
(Thousands, except per share amounts) | ||||||||||
Basic EPS | ||||||||||
Net loss available for common stock | $ | ( | ) | $ | ( | ) | ||||
Diluted EPS | ||||||||||
Effect of dilutive securities | ||||||||||
Net loss available for common stock and common stock equivalents | $ | ( | ) | $ | ( | ) | ||||
Three Months Ended March 31, 2019 | ||||||||||
Income (Loss) | Shares | Per Share Amount | ||||||||
(Thousands, except per share amounts) | ||||||||||
Basic EPS | ||||||||||
Net income available for common stock | $ | $ | ||||||||
Diluted EPS | ||||||||||
Effect of dilutive securities | ||||||||||
Net income available for common stock and common stock equivalents | $ | $ | ||||||||
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H. | EMPLOYEE BENEFIT PLANS |
The following table sets forth the components of net periodic benefit cost for our retirement and other postretirement benefit plans for the periods indicated:
Retirement Benefits | Other Postretirement Benefits | ||||||||||||||
Three Months Ended | Three Months Ended | ||||||||||||||
March 31, | March 31, | ||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||
(Thousands of dollars) | |||||||||||||||
Components of net periodic benefit cost | |||||||||||||||
Service cost | $ | $ | $ | $ | |||||||||||
Interest cost | |||||||||||||||
Expected return on plan assets | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Amortization of prior service cost (credit) (a) | ( | ) | |||||||||||||
Amortization of net loss (a) | |||||||||||||||
Net periodic benefit cost (income) | $ | $ | $ | ( | ) | $ | |||||||||
(a) - These components of net periodic benefit cost are recognized in accumulated other comprehensive loss and are reclassified to other income (expense) in our Consolidated Statements of Income, with related income tax benefits of $1.1 million and $0.7 million reclassified to income tax (expense) benefit for the three months ended March 31, 2020 and 2019, respectively.
I. | UNCONSOLIDATED AFFILIATES |
Equity in Net Earnings from Investments and Impairments - The following table sets forth our equity in net earnings (loss) from investments for the periods indicated:
Three Months Ended | |||||||
March 31, | |||||||
2020 | 2019 | ||||||
(Thousands of dollars) | |||||||
Northern Border Pipeline | $ | $ | |||||
Overland Pass Pipeline | |||||||
Roadrunner | |||||||
Other | ( | ) | |||||
Equity in net earnings from investments | $ | $ | |||||
Impairment of equity investments | $ | ( | ) | $ | |||
For the three months ended March 31, 2020, we recorded a noncash impairment charge of $30.5 million related to our 10.2 % investment in Venice Energy Services Company in our Natural Gas Gathering and Processing segment, which includes $22.3 million related to equity-method goodwill, and a $7.2 million noncash impairment charge related to our 50 % investment in Chisholm Pipeline Company in our Natural Gas Liquids segment. Our remaining equity-method goodwill was $16.5 million at March 31, 2020. For additional information on our impairment charges, see Note A.
We incurred expenses in transactions with unconsolidated affiliates of $45.3 million and $41.8 million for the three months ended March 31, 2020 and 2019, respectively, primarily related to Overland Pass Pipeline and Northern Border Pipeline. Accounts payable to our equity-method investees at March 31, 2020, and December 31, 2019, were $14.7 million and $13.5 million, respectively.
J. | 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
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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 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 believes that, based on currently known information, compliance with these laws and regulations will not affect adversely our consolidated results of operations, financial condition or cash flows.
Legal Proceedings - We are a party to various litigation matters and claims that have arisen in the normal course of our operations. While the results of these litigation matters and claims cannot be predicted with certainty, we believe the reasonably possible losses from such matters, individually and in the aggregate, are not material. Additionally, we believe the probable final outcome of such matters will not have a material adverse effect on our consolidated results of operations, financial position or cash flows.
K. | LEASES |
In December 2019, we entered into an operating lease for pipeline capacity with a lease term of 10 years that commenced January 1, 2020. In connection with this lease, we recognized an operating lease right-of-use asset and a lease liability with remaining balances of $74.0 million and $74.2 million, respectively, as of March 31, 2020. During the three months ended March 31, 2020, we entered into certain operating leases and recognized operating lease right-of-use assets and lease liabilities with remaining balances of $17.2 million at the end of the period. At March 31, 2020, the weighted-average remaining lease term and the weighted-average discount rate for our operating leases were 8.8 years and 3.15 %, respectively.
The following table sets forth information about our supplemental cash flows related to our leases:
Three Months Ended | ||||||||
March 31, | ||||||||
2020 | 2019 | |||||||
(Thousands of dollars) | ||||||||
Cash paid for amounts included in the measurement of lease liabilities | ||||||||
Operating cash flows for operating leases | $ | $ | ||||||
Financing cash flows for finance lease | $ | $ | ||||||
Right-of-use assets obtained in exchange for operating lease liabilities (noncash) | $ | $ | ||||||
The following table sets forth the maturity of our lease liabilities as of March 31, 2020:
Finance Lease | Operating Leases | |||||||
(Millions of dollars) | ||||||||
Remainder of 2020 | $ | $ | ||||||
2021 | ||||||||
2022 | ||||||||
2023 | ||||||||
2024 | ||||||||
2025 and beyond | ||||||||
Total lease payments | ||||||||
Less: Interest | ||||||||
Present value of lease liabilities | $ | $ | ||||||
L. | REVENUES |
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Contract Assets and Contract Liabilities - Our contract asset balances at the beginning and end of the period primarily relate to our firm service transportation 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, 2019 (a) | $ | |||
Revenue recognized included in beginning balance | ( | ) | ||
Net additions | ||||
Balance at March 31, 2020 (b) | $ | |||
(a) - Contract liabilities of $22.2 million and $34.9 million are included in other current liabilities and other deferred credits, respectively, in our Consolidated Balance Sheet.
(b) - Contract liabilities of $11.9 million and $33.8 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 March 31, 2020, and December 31, 2019, relate to customer receivables. Revenues sources are disaggregated in Note M.
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 March 31, 2020, and the amounts we expect to recognize in revenue in future periods, related primarily to firm transportation and storage contracts with remaining contract terms ranging from one month to 24 years :
Expected Period of Recognition in Revenue | (Millions of dollars) | |||
Remainder of 2020 | $ | |||
2021 | ||||
2022 | ||||
2023 | ||||
2024 and beyond | ||||
Total estimated transaction price allocated to unsatisfied performance obligations | $ | |||
The table above excludes variable consideration allocated entirely to wholly unsatisfied performance obligations, wholly unsatisfied promises to transfer distinct goods or services that are part of a single performance obligation and consideration we determine to be fully constrained. The amounts we determined to be fully constrained relate to future sales obligations under long-term sales contracts where the transaction price is not known and minimum volume agreements, which we consider to be fully constrained until invoiced.
M. | SEGMENTS |
Segment Descriptions - Our operations are divided into three reportable business segments, as follows:
• | our Natural Gas Gathering and Processing segment gathers, treats and processes natural gas; |
• | our Natural Gas Liquids segment gathers, treats, fractionates and transports NGLs and stores, markets and distributes NGL products; and |
• | our Natural Gas Pipelines segment operates regulated interstate and intrastate natural gas transmission pipelines and natural gas storage facilities. |
Other and eliminations consist of corporate costs, the operating and leasing activities of our headquarters building and related parking facility and eliminations necessary to reconcile our reportable segments to our Consolidated Financial Statements.
Accounting Policies - The accounting policies of the segments are described in Note A of the Notes to Consolidated Financial Statements in our Annual Report.
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Operating Segment Information - The following tables set forth certain selected financial information for our operating segments for the periods indicated:
Three Months Ended March 31, 2020 | Natural Gas Gathering and Processing | Natural Gas Liquids (a) | Natural Gas Pipelines (b) | Total Segments | |||||||||||
(Thousands of dollars) | |||||||||||||||
NGL and condensate sales | $ | $ | $ | $ | |||||||||||
Residue natural gas sales | |||||||||||||||
Gathering, processing and exchange services revenue | |||||||||||||||
Transportation and storage revenue | |||||||||||||||
Other | |||||||||||||||
Total revenues (c) | |||||||||||||||
Cost of sales and fuel (exclusive of depreciation and operating costs) | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Operating costs | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Equity in net earnings from investments | |||||||||||||||
Noncash compensation expense and other | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Segment adjusted EBITDA | $ | $ | $ | $ | |||||||||||
Depreciation and amortization | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
Impairment charges | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | |||||
Investments in unconsolidated affiliates | $ | $ | $ | $ | |||||||||||
Total assets | $ | $ | $ | $ | |||||||||||
Capital expenditures | $ | $ | $ | $ | |||||||||||
(a) - Our Natural Gas Liquids segment has regulated and nonregulated operations. Our Natural Gas Liquids segment’s regulated operations had revenues of $435.1 million, of which $378.2 million related to revenues within the segment, and cost of sales and fuel of $120.4 million.
(b) - Our Natural Gas Pipelines segment has regulated and nonregulated operations. Our Natural Gas Pipelines segment’s regulated operations had revenues of $73.9 million and cost of sales and fuel of $6.1 million.
(c) - Intersegment revenues for the Natural Gas Gathering and Processing segment totaled $213.3 million. Intersegment revenues for the Natural Gas Liquids and Natural Gas Pipelines segments were not material.
Three Months Ended March 31, 2020 | Total Segments | Other and Eliminations | Total | |||||||||
(Thousands of dollars) | ||||||||||||
Reconciliations of total segments to consolidated | ||||||||||||
NGL and condensate sales | $ | $ | ( | ) | $ | |||||||
Residue natural gas sales | ( | ) | ||||||||||
Gathering, processing and exchange services revenue | ||||||||||||
Transportation and storage revenue | ( | ) | ||||||||||
Other | ( | ) | ||||||||||
Total revenues (a) | $ | $ | ( | ) | $ | |||||||
Cost of sales and fuel (exclusive of depreciation and operating costs) | $ | ( | ) | $ | $ | ( | ) | |||||
Operating costs | $ | ( | ) | $ | $ | ( | ) | |||||
Depreciation and amortization | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
Impairment charges | $ | ( | ) | $ | $ | ( | ) | |||||
Equity in net earnings from investments | $ | $ | $ | |||||||||
Investments in unconsolidated affiliates | $ | $ | $ | |||||||||
Total assets | $ | $ | $ | |||||||||
Capital expenditures | $ | $ | $ | |||||||||
(a) - Noncustomer revenue for the three months ended March 31, 2020, totaled $80.2 million related primarily to gains from derivatives on commodity contracts.
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Three Months Ended March 31, 2019 | Natural Gas Gathering and Processing | Natural Gas Liquids (a) | Natural Gas Pipelines (b) | Total Segments | |||||||||||
(Thousands of dollars) | |||||||||||||||
NGL and condensate sales | $ | $ | $ | $ | |||||||||||
Residue natural gas sales | |||||||||||||||
Gathering, processing and exchange services revenue | |||||||||||||||
Transportation and storage revenue | |||||||||||||||
Other | |||||||||||||||
Total revenues (c) | |||||||||||||||
Cost of sales and fuel (exclusive of depreciation and operating costs) | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Operating costs | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Equity in net earnings (loss) from investments | ( | ) | |||||||||||||
Noncash compensation expense and other | |||||||||||||||
Segment adjusted EBITDA | $ | $ | $ | $ | |||||||||||
Depreciation and amortization | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
Investments in unconsolidated affiliates | $ | $ | $ | $ | |||||||||||
Total assets | $ | $ | $ | $ | |||||||||||
Capital expenditures | $ | $ | $ | $ | |||||||||||
(a) - Our Natural Gas Liquids segment has regulated and nonregulated operations. Our Natural Gas Liquids segment’s regulated operations had revenues of $323.1 million, of which $270.0 million related to sales within the segment, and cost of sales and fuel of $118.5 million.
(b) - Our Natural Gas Pipelines segment has regulated and nonregulated operations. Our Natural Gas Pipelines segment’s regulated operations had revenues of $70.1 million and cost of sales and fuel of $5.6 million.
(c) - Intersegment revenues for the Natural Gas Gathering and Processing segment totaled $335.8 million. Intersegment revenues for the Natural Gas Liquids and Natural Gas Pipelines segments were not material.
Three Months Ended March 31, 2019 | Total Segments | Other and Eliminations | Total | |||||||||
(Thousands of dollars) | ||||||||||||
Reconciliations of total segments to consolidated | ||||||||||||
NGL and condensate sales | $ | $ | ( | ) | $ | |||||||
Residue natural gas sales | ||||||||||||
Gathering, processing and exchange services revenue | ||||||||||||
Transportation and storage revenue | ( | ) | ||||||||||
Other | ( | ) | ||||||||||
Total revenues (a) | $ | $ | ( | ) | $ | |||||||
Cost of sales and fuel (exclusive of depreciation and operating costs) | $ | ( | ) | $ | $ | ( | ) | |||||
Operating costs | $ | ( | ) | $ | $ | ( | ) | |||||
Depreciation and amortization | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
Equity in net earnings from investments | $ | $ | $ | |||||||||
Investments in unconsolidated affiliates | $ | $ | $ | |||||||||
Total assets | $ | $ | $ | |||||||||
Capital expenditures | $ | $ | $ | |||||||||
(a) - Noncustomer revenue for the three months ended March 31, 2019, totaled $22.3 million related primarily to gains from derivatives on commodity contracts.
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Three Months Ended | |||||||
March 31, | |||||||
2020 | 2019 | ||||||
(Thousands of dollars) | |||||||
Reconciliation of net income (loss) to total segment adjusted EBITDA | |||||||
Net income (loss) | $ | ( | ) | $ | |||
Add: | |||||||
Interest expense, net of capitalized interest | |||||||
Depreciation and amortization | |||||||
Income tax expense (benefit) | ( | ) | |||||
Impairment charges | |||||||
Noncash compensation expense | ( | ) | |||||
Other corporate costs and noncash items (a) | ( | ) | ( | ) | |||
Total segment adjusted EBITDA | $ | $ | |||||
(a) - The three months ended March 31, 2020, includes a corporate $15.8 million gain on extinguishment of debt related to open market repurchases.
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 - Late in the first quarter 2020, the energy industry experienced historic events that led to a simultaneous demand and supply shock. The World Health Organization declared the novel strain of COVID-19 a global pandemic and recommended containment and mitigation measures worldwide, which contributed to a massive economic slowdown and decreased demand for crude oil. In addition, Saudi Arabia and Russia increased production of crude oil as the two countries competed for market share. As a result, the global supply of crude oil significantly exceeded demand and led to a collapse in crude oil prices. Despite recently announced production cuts from many oil producing countries, supply exceeds demand, crude oil storage is near capacity and prices remain volatile. WTI crude oil dipped below $20.00 per barrel in the month of March and declined to an average of approximately $45.00 per barrel in the first quarter 2020, compared with an average of approximately $55.00 per barrel in the first quarter 2019. The collapse in crude oil prices and demand for energy commodities has also contributed to lower NGL product prices and lower natural gas prices, which is creating challenges for crude oil and natural gas producers as they assess their future drilling and production plans.
In response to these events, we are taking steps to manage potential impacts of the COVID-19 outbreak on our employees, customers and the communities where we operate and do business. As always, we remain focused on operating our assets safely, reliably and in an environmentally responsible manner. We are taking actions to continue safe operations, protect our workforce and implement appropriate cost reduction measures. We have reduced our planned 2020 capital-growth expenditures by approximately $900 million. We continue to monitor the COVID-19 outbreak and have implemented our business continuity plans. ONEOK is a critical infrastructure business as defined by the United States Department of Homeland Security, and, therefore, our workforce remains fully engaged in the midst of government issued stay-at-home orders. We implemented remote work procedures when possible to protect the safety of our employees and their families, and have taken extra precautions for our employees who work in the field or need to report to a ONEOK facility, such as increased facility access restrictions and sanitation procedures. We continue to implement risk-management and cybersecurity measures designed to ensure that our systems remain functional in order to both serve our operational needs and to provide service to our customers. We have reduced work performed by contractors and continue to look for opportunities to reduce expenses.
Due to the current commodity price and market environment, we experienced a significant decline in our share price and market capitalization, and performed a Step 1 analysis to test our goodwill for impairment and evaluated certain long-lived asset groups and equity investments for impairment. As a result, we recorded $641.8 million in noncash impairment charges,
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which had an adverse impact on our first-quarter 2020 financial results. However, we expect to maintain sufficient liquidity and financial stability in 2020 due to cash flows from operations and our $2.5 Billion Credit Agreement. Our credit ratings have not been negatively affected by these events. In March 2020, the CARES Act was signed into law in response to the COVID-19 pandemic, and we opted into the CARES Act 401(k) hardship withdrawal and loan deferral programs for employees. While this legislation includes tax provisions that will modestly benefit us, we do not expect the CARES Act to materially impact us.
Due to the current commodity price environment and expected rig reductions, we expect adverse impact to our volume expectations and cash flows in 2020; however, we expect this impact to be partially mitigated by the significant amount of flared natural gas in the Williston Basin and our fully contracted positions in the Permian Basin. We are monitoring producers’ drilling, completion and production plans and are evaluating the impact on our future volume expectations. We are also monitoring regulatory developments in several of the states where we operate, where regulators are considering imposing limits on oil production, which could further impact our volume expectations. The energy industry has historically experienced down cycles from disruptive events, and as a result, we have previously positioned ourselves to minimize exposure to direct commodity price volatility and volumetric risk. Each of our three reportable segment’s earnings are primarily fee-based, and we expect our consolidated earnings to be approximately 90% fee-based in 2020. While our Natural Gas Gathering and Processing segment’s earnings are primarily fee-based, we have some direct commodity price exposure related primarily to POP contracts. Under certain POP with fee contracts, our contractual fees and POP percentage may increase or decrease if production volumes, delivery pressures or commodity prices change relative to specified thresholds. In addition, although our Natural Gas Gathering and Processing and Natural Gas Liquids segments generate primarily fee-based earnings, those segments’ results of operations are exposed to volumetric risk as a result of reduced drilling and completion activity, declining well productivity, severe weather disruptions, operational outages and ethane demand. Our Natural Gas Pipelines segment is not exposed to significant volumetric risk due to nearly all our capacity being subscribed under long-term firm contracts.
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.
Williston Basin Natural Gas Capture - In our Natural Gas Gathering and Processing segment, gathered and processed volumes increased in the first quarter 2020, compared with the same period in 2019, due primarily to increased processing capacity from completed capital-growth projects, the capture of natural gas previously flared by producers and new well connections. Our Demicks Lake I natural gas processing plant was placed in service in October 2019, and our Demicks Lake II natural gas processing plant was placed in service in the first quarter 2020, increasing our total processing capacity to approximately 1.5 Bcf/d in the Williston Basin. These plants enable us to capture natural gas previously flared by producers on our more than 3 million dedicated acres in the Williston Basin. The current weakened commodity price environment is creating challenges for producers, and we expect decreased drilling and completion activity for the remainder of 2020.
Northern Border Pipeline, which provides key natural gas takeaway capacity out of the Williston Basin, recently notified shippers that it plans to place limits on the Btu content of the residue natural gas it receives in order to meet downstream pipeline specifications. When these limits take effect, natural gas processors in the Williston Basin may recover incremental ethane into the NGL stream in order to lower the Btu content of the residue natural gas delivered to Northern Border Pipeline. As a result, ethane deliveries to our NGL system may increase.
Mid-Continent Region - Due to the current commodity price environment, we expect a decline in demand for our services in all of our segments in the Mid-Continent as producers decrease drilling and completion activities in this region.
NGLs - In our Natural Gas Liquids segment, we are the largest NGL takeaway provider in the Rocky Mountain region where volumes continued to increase in the first quarter 2020, compared with the same period in 2019, from our new and existing processing plants, third-party processing plants and volumes previously flared by producers. As a result, we have reached approximately 240 MBbl/d of NGLs transported out of this region to downstream market centers through our integrated value chain, which was strengthened through our recently completed capital-growth projects. Our Elk Creek pipeline was completed in two phases during the second half of 2019, and we have completed construction of our Arbuckle II pipeline. During the first quarter 2020, we completed construction of our MB-4 fractionator, with a capacity of 125 MBbl/d, which is fully contracted. These additions were needed to accommodate the Rocky Mountain and Permian region volume growth we have experienced. However, due to recent events, the current weakened commodity price environment is creating challenges for producers across our system, and we expect decreased drilling and completion activity in the remainder of 2020.
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Growth Projects - We operate an integrated, reliable and diversified network of natural gas gathering, processing, storage and transportation assets connecting NGL supply in the Rocky Mountain, Permian and Mid-Continent regions with key market centers. Since the beginning of 2018, we have completed several capital-growth projects that include NGL pipelines, NGL fractionators, natural gas processing plants and related natural gas and NGL infrastructure. Due to the collapse in crude oil prices and massive decline in demand for energy commodities, we reduced our planned 2020 capital-growth expenditures by approximately $900 million, including the suspension of our recently announced plans to construct the Demicks Lake III natural gas processing plant, a fourth expansion of the West Texas LPG pipeline system and reduction in the scope of the expansion of our Elk Creek pipeline. We have also paused various other projects as noted in the table below, which can be restarted quickly when drilling activity resumes. We expect capital expenditures to continue to decrease for the remainder of 2020 and into 2021. Our announced large capital-growth projects that have recently been completed or are in various stages of construction are outlined in the table below:
Project | Scope | Approximate Costs (a) | Original Target Completion |
Natural Gas Gathering and Processing | (In millions) | ||
Demicks Lake I plant and related infrastructure | 200 MMcf/d processing plant and related gathering infrastructure in the core of the Williston Basin | $400 | Completed October 2019 |
Supported by acreage dedications with long-term primarily fee-based contracts | |||
Demicks Lake II plant and related infrastructure | 200 MMcf/d processing plant and related gathering infrastructure in the core of the Williston Basin | $410 | Completed January 2020 |
Supported by acreage dedications with long-term primarily fee-based contracts | |||
Bear Creek plant expansion and related infrastructure | 200 MMcf/d processing plant expansion and related gathering infrastructure in the Williston Basin | $405 | First Quarter 2021(b) |
Supported by acreage dedications with long-term primarily fee-based contracts | |||
(a) - Excludes capitalized interest/AFUDC. (b) - Given the current environment, we paused the majority of construction activities on this project and do not expect to complete construction by the original target completion date. | |||
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Project | Scope | Approximate Costs (a) | Original Target Completion |
Natural Gas Liquids | |||
Elk Creek pipeline and related infrastructure | 900-mile NGL pipeline from the Williston Basin to the Mid-Continent region, with capacity of up to 240 MBbl/d, and related infrastructure | $1,400 | Completed December 2019 |
Anchored by long-term contracts | |||
Expansion capability up to 400 MBbl/d with additional pump facilities | |||
Arbuckle II pipeline and related infrastructure | 530-mile NGL pipeline from the STACK area to Mont Belvieu, Texas, and related infrastructure | $1,360 | Completed March 2020 |
Supported by long-term contracts | |||
Expansion capability up to 1 MMBbl/d | |||
West Texas LPG pipeline expansion and Arbuckle II connection | Increasing mainline capacity by 80 MBbl/d with additional pump facilities and pipeline looping | $295 | First Quarter 2020 (b) |
Connecting West Texas LPG pipeline system to the Arbuckle II pipeline | |||
Supported by long-term dedicated production from six third-party processing plants expected to produce up to 60 MBbl/d | |||
MB-4 fractionator and related infrastructure | 125 MBbl/d NGL fractionator in Mont Belvieu, Texas, and related infrastructure, which includes additional NGL storage in Mont Belvieu | $575 | Completed March 2020 (c) |
Fully contracted with long-term contracts | |||
Bakken NGL pipeline extension | 75-mile NGL pipeline in the Williston Basin connecting to a third-party processing plant | $100 | Fourth Quarter 2020 |
Supported by a long-term contract with a minimum volume commitment | |||
Arbuckle II extension project and additional gathering infrastructure | Provide additional takeaway capacity in the STACK area | $240 | First Quarter 2021 |
Allow increasing volumes on the Elk Creek pipeline access to fractionation capacity at Mont Belvieu, Texas | |||
Arbuckle II pipeline expansion | Increasing mainline capacity with additional pump facilities | $60 | First Quarter 2021 |
Increases capacity to 500 MBbl/d | |||
MB-5 fractionator and related infrastructure | 125 MBbl/d NGL fractionator in Mont Belvieu, Texas, and related infrastructure, which includes additional NGL storage in Mont Belvieu | $750 | First Quarter 2021 (d) |
Fully contracted with long-term contracts | |||
West Texas LPG pipeline expansion | Increasing mainline capacity by 40 MBbl/d | $145 | First Quarter 2021 (d) |
Supported by long-term dedicated production from third-party processing plants expected to produce up to 45 MBbl/d | |||
Mid-Continent fractionation facility expansions | 65 MBbl/d of expansions at our Mid-Continent NGL facilities | $150 | First Quarter 2021 (d) |
(a) - Excludes capitalized interest/AFUDC.
(b) - We completed expansions to increase mainline capacity by approximately 45 MBbl/d and expect to complete the remaining portion of this project, which was delayed due to weather, in May 2020.
(c) - We completed 75 MBbl/d in December 2019 and completed the remaining 50 MBbl/d in March 2020.
(d) - Given the current environment, we paused the majority of construction activities on these projects and do not expect to complete construction by the original target completion dates.
Ethane Production - Ethane volumes under long-term contracts delivered to our NGL system have generally been increasing since 2017, primarily as a result of NGL demand increasing from exports and petrochemical companies completing ethylene production projects and plant expansions. Our completed NGL capital-growth projects have helped alleviate system constraints, enabling additional NGLs, including ethane, to reach the Mont Belvieu, Texas, market center. However, ethane volumes delivered to our NGL system averaged 385 MBbl/d in the first quarter 2020, compared with 411 MBbl/d in the first quarter 2019, with the decrease primarily due to ethane rejection. Due to the collapse of energy prices in March 2020 and continuing volatility, we expect that higher ethane rejection is likely to continue through the remainder of 2020.
Impairments - Based on the results of our goodwill impairment test and evaluation of certain long-lived asset groups and equity investments for impairment, we recorded the following impairment charges:
Natural Gas Gathering and Processing - For the three months ended March 31, 2020, we recorded $380.5 million of noncash impairment charges related primarily to certain long-lived asset groups that were not recoverable, $153.4 million of noncash
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impairment charges related to goodwill and $30.5 million of noncash impairment charges related to our 10.2% investment in Venice Energy Services Company.
Natural Gas Liquids - For the three months ended March 31, 2020, we recorded $70.2 million of noncash impairment charges related to certain inactive assets and $7.2 million of noncash impairment charges related to our 50% investment in Chisholm Pipeline Company.
For additional information on our impairment charges, see Note A of the Notes to Consolidated Financial Statements in this Quarterly Report.
Debt Issuances and Repurchases - In early March 2020, we completed an underwritten public offering of $1.75 billion senior unsecured notes consisting of $400 million, 2.2% senior notes due 2025; $850 million, 3.1% senior notes due 2030; and $500 million, 4.5% senior notes due 2050. The net proceeds, after deducting underwriting discounts, commissions and offering expenses, were $1.73 billion. A portion of the proceeds were used to pay all outstanding amounts under our commercial paper program. The remainder was, and will be, used for general corporate purposes, which may include repayment of existing indebtedness and funding capital expenditures. In March 2020, we repurchased in the open market $67.0 million outstanding principal of certain of our senior notes for an aggregate repurchase price of $50.5 million with cash on hand. In connection with these open market repurchases, we recognized a $15.8 million gain on extinguishment of debt, which is included in other income in our Consolidated Statement of Income for the three months ended March 31, 2020.
Dividends - In February 2020, we paid a quarterly dividend of $0.935 per share ($3.74 per share on an annualized basis), an increase of 9% compared with the same quarter in the prior year. We declared a quarterly dividend of $0.935 per share ($3.74 per share on an annualized basis) in April 2020. The quarterly dividend will be paid May 14, 2020, to shareholders of record at the close of business on April 27, 2020.
FINANCIAL RESULTS AND OPERATING INFORMATION
Consolidated Operations
Selected Financial Results - The following table sets forth certain selected financial results for the periods indicated:
Three Months Ended | Three Months | ||||||||||
March 31, | 2020 vs. 2019 | ||||||||||
Financial Results | 2020 | 2019 | Increase (Decrease) | ||||||||
(Millions of dollars) | |||||||||||
Revenues | |||||||||||
Commodity sales | $ | 1,808.6 | $ | 2,473.0 | $ | (664.4 | ) | ||||
Services | 328.1 | 307.0 | 21.1 | ||||||||
Total revenues | 2,136.7 | 2,780.0 | (643.3 | ) | |||||||
Cost of sales and fuel (exclusive of items shown separately below) | 1,276.9 | 1,956.4 | (679.5 | ) | |||||||
Operating costs | 207.1 | 240.8 | (33.7 | ) | |||||||
Depreciation and amortization | 132.4 | 114.2 | 18.2 | ||||||||
Impairment charges | 604.0 | — | 604.0 | ||||||||
Gain on sale of assets | (0.2 | ) | (0.1 | ) | 0.1 | ||||||
Operating income (loss) | $ | (83.5 | ) | $ | 468.7 | $ | (552.2 | ) | |||
Equity in net earnings from investments | $ | 44.6 | $ | 43.5 | $ | 1.1 | |||||
Impairment of equity investments | $ | (37.7 | ) | $ | — | $ | (37.7 | ) | |||
Interest expense, net of capitalized interest | $ | (140.6 | ) | $ | (115.4 | ) | $ | 25.2 | |||
Net income (loss) | $ | (141.9 | ) | $ | 337.2 | $ | (479.1 | ) | |||
Adjusted EBITDA | $ | 700.8 | $ | 637.5 | $ | 63.3 | |||||
Capital expenditures | $ | 949.7 | $ | 889.7 | $ | 60.0 | |||||
See reconciliation of net income (loss) to adjusted EBITDA in the “Adjusted EBITDA” section.
Changes in commodity prices and sales volumes affect both revenues and cost of sales and fuel in our Consolidated Statements of Income, and, therefore, the impact is largely offset between these line items.
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Operating income (loss) decreased for the three months ended March 31, 2020, compared with the same period in 2019, primarily as a result of the following:
• | a decrease of $604.0 million due to noncash impairment charges in our Natural Gas Gathering and Processing and Natural Gas Liquids segments; and |
• | an increase of $18.2 million in depreciation expense due to capital projects placed in service; offset partially by |
• | Natural Gas Gathering and Processing - an increase of $22.0 million due primarily to higher volumes in the Williston Basin, offset partially by a decrease of $18.0 million due primarily to lower realized prices impacting our POP with fee contracts; |
• | Natural Gas Liquids - an increase of $89.0 million in exchange services due primarily to higher volumes in the Rocky Mountain region and Permian Basin, offset partially by a decrease of $60.6 million in optimization and marketing due primarily to lower marketing earnings due to the timing of purity NGL inventory sales, changes in the value of NGLs held in inventory and narrower location price differentials; |
• | Natural Gas Pipelines - an increase of $5.4 million from higher transportation services due primarily to higher firm transportation capacity contracted due to our completed expansion projects in 2019 and higher firm transportation rates; and |
• | a decrease of $33.7 million in operating costs due primarily to the noncash mark-to-market impact of our share-based deferred compensation plan and lower employee-related costs. |
Net income (loss) decreased for the three months ended March 31, 2020, compared with the same period in 2019, due primarily to the items discussed above and noncash impairment charges related to equity investments in our Natural Gas Gathering and Processing and Natural Gas Liquids segments, offset partially by income tax benefits and a $15.8 million gain on extinguishment of debt related to open market repurchases.
Capital expenditures increased for the three months ended March 31, 2020, compared with the same period in 2019, due primarily to spending on our capital-growth projects.
Additional information regarding our financial results and operating information is provided in the following discussion for each of our segments.
Natural Gas Gathering and Processing
Overview - Our Natural Gas Gathering and Processing segment provides midstream services to producers in North Dakota, Montana, Wyoming, Kansas and Oklahoma. Raw natural gas is typically gathered at the wellhead, compressed and transported through pipelines to our processing facilities. Processed natural gas, usually referred to as residue natural gas, is then recompressed and delivered to natural gas pipelines, storage facilities and end users. The NGLs separated from the raw natural gas are sold and delivered through NGL pipelines to fractionation facilities for further processing.
Our Natural Gas Gathering and Processing segment’s earnings are primarily fee-based, but we have some direct commodity price exposure related primarily to POP contracts. Under certain POP with fee contracts, our contractual fees and POP percentage may increase or decrease if production volumes, delivery pressures or commodity prices change relative to specified thresholds. Due to the current commodity price environment, our contractual fees on some contracts in the Rocky Mountain region have decreased, which we expect will impact our 2020 average fee rate. To mitigate the impact of this commodity price exposure, we have hedged a portion of our Natural Gas Gathering and Processing segment’s commodity price risk for the remainder of 2020 and 2021. This segment has substantial long-term acreage dedications in some of the most productive areas of the Williston Basin, which helps to mitigate volumetric risk.
Growth Projects - Our Natural Gas Gathering and Processing segment has invested in growth projects in NGL-rich areas in the Williston Basin, that we expect will enable us to meet the needs of crude oil and natural gas producers in those areas. See “Growth Projects” in the “Recent Developments” section for discussion of our capital-growth projects.
For a discussion of our capital expenditure financing, see “Capital Expenditures” in the “Liquidity and Capital Resources” section.
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Selected Financial Results - The following table sets forth certain selected financial results for our Natural Gas Gathering and Processing segment for the periods indicated:
Three Months Ended | Three Months | ||||||||||
March 31, | 2020 vs. 2019 | ||||||||||
Financial Results | 2020 | 2019 | Increase (Decrease) | ||||||||
(Millions of dollars) | |||||||||||
NGL sales | $ | 178.4 | $ | 287.4 | $ | (109.0 | ) | ||||
Condensate sales | 41.5 | 44.9 | (3.4 | ) | |||||||
Residue natural gas sales | 189.1 | 319.0 | (129.9 | ) | |||||||
Gathering, compression, dehydration and processing fees and other revenue | 41.0 | 43.4 | (2.4 | ) | |||||||
Cost of sales and fuel (exclusive of depreciation and operating costs) | (202.2 | ) | (450.9 | ) | (248.7 | ) | |||||
Operating costs, excluding noncash compensation adjustments | (87.8 | ) | (89.3 | ) | (1.5 | ) | |||||
Equity in net earnings (loss) from investments | 0.8 | (1.2 | ) | 2.0 | |||||||
Other | (1.2 | ) | (1.1 | ) | (0.1 | ) | |||||
Adjusted EBITDA | $ | 159.6 | $ | 152.2 | $ | 7.4 | |||||
Impairment charges | $ | 564.4 | $ | — | $ | 564.4 | |||||
Capital expenditures | $ | 181.6 | $ | 215.1 | $ | (33.5 | ) | ||||
See reconciliation of net income (loss) to adjusted EBITDA in the “Adjusted EBITDA” section.
Changes in commodity prices and sales volumes affect both revenues and cost of sales and fuel, and, therefore, the impact is largely offset between these line items.
Adjusted EBITDA increased $7.4 million for the three months ended March 31, 2020, compared with the same period in 2019, primarily as a result of the following:
• | an increase of $22.0 million due primarily to higher volumes in the Williston Basin; offset partially by |
• | a decrease of $18.0 million due primarily to lower realized prices impacting our POP with fee contracts. |
For the three months ended March 31, 2020, we recorded $380.5 million of noncash impairment charges related primarily to certain long-lived asset groups in western Oklahoma, Kansas and the Powder River Basin that were not recoverable, a $153.4 million noncash impairment charge related to goodwill and a $30.5 million noncash impairment charge related to our 10.2% investment in Venice Energy Services Company. For additional information on our impairment charges, see Note A of the Notes to Consolidated Financial Statements in this Quarterly Report.
Capital expenditures decreased for the three months ended March 31, 2020, compared with the same period in 2019, due primarily to completed capital-growth projects.
Selected Operating Information - The following table sets forth selected operating information for our Natural Gas Gathering and Processing segment for the periods indicated:
Three Months Ended | |||||||
March 31, | |||||||
Operating Information (a) | 2020 | 2019 | |||||
Natural gas gathered (BBtu/d) | 2,769 | 2,636 | |||||
Natural gas processed (BBtu/d) (b) | 2,568 | 2,442 | |||||
NGL sales (MBbl/d) | 239 | 214 | |||||
Residue natural gas sales (BBtu/d) (b) | 1,200 | 1,130 | |||||
Average fee rate ($/MMBtu) | $ | 0.85 | $ | 0.91 | |||
(a) - Includes volumes for consolidated entities only.
(b) - Includes volumes we processed at company-owned and third-party facilities.
Our natural gas gathered, natural gas processed, NGL sales and residue natural gas sales volumes increased for the three months ended March 31, 2020, compared with the same period in 2019, due primarily to our completed capital-growth projects and continued producer improvements in production due to enhanced completion techniques, offset partially by natural production declines.
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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, Missouri, Nebraska, Iowa and Illinois. 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 own and operate truck- and rail-loading and -unloading facilities connected 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.
Growth Projects - Our Natural Gas Liquids segment invests in projects to transport, fractionate, store and deliver to market centers NGL supply from shale and other resource development areas. Our growth strategy is focused around connecting diversified supply basins from the Rocky Mountain region through the Mid-Continent region and the Permian Basin with NGL product demand from the petrochemical industry and NGL export demand in the Gulf Coast. See “Growth Projects” in the “Recent Developments” section for discussion of our capital-growth projects.
In the three months ended March 31, 2020, we connected one third-party natural gas processing plant in the Permian Basin to our NGL system. In addition, one affiliate and two third-party natural gas processing plants connected to our system in the Rocky Mountain region were expanded.
For a discussion of our capital expenditure financing, see “Capital Expenditures” in the “Liquidity and Capital Resources” section.
Selected Financial Results - The following table sets forth certain selected financial results for our Natural Gas Liquids segment for the periods indicated:
Three Months Ended | Three Months | ||||||||||
March 31, | 2020 vs. 2019 | ||||||||||
Financial Results | 2020 | 2019 | Increase (Decrease) | ||||||||
(Millions of dollars) | |||||||||||
NGL and condensate sales | $ | 1,596.7 | $ | 2,158.1 | $ | (561.4 | ) | ||||
Exchange service revenues and other | 123.1 | 101.1 | 22.0 | ||||||||
Transportation and storage revenues | 50.8 | 52.3 | (1.5 | ) | |||||||
Cost of sales and fuel (exclusive of depreciation and operating costs) | (1,278.8 | ) | (1,846.7 | ) | (567.9 | ) | |||||
Operating costs, excluding noncash compensation adjustments | (94.4 | ) | (103.4 | ) | (9.0 | ) | |||||
Equity in net earnings from investments | 15.3 | 17.5 | (2.2 | ) | |||||||
Other | (1.8 | ) | (1.3 | ) | (0.5 | ) | |||||
Adjusted EBITDA | $ | 410.9 | $ | 377.6 | $ | 33.3 | |||||
Impairment charges | $ | 77.4 | $ | — | $ | 77.4 | |||||
Capital expenditures | $ | 746.2 | $ | 639.3 | $ | 106.9 | |||||
See reconciliation of net income (loss) to adjusted EBITDA in the “Adjusted EBITDA” section.
Changes in commodity prices and sales volumes affect both revenues and cost of sales and fuel, and, therefore, the impact is largely offset between these line items.
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Adjusted EBITDA increased $33.3 million for the three months ended March 31, 2020, compared with the same period in 2019, primarily as a result of the following:
• | an increase of $89.0 million in exchange services due to $60.2 million in higher volumes primarily in the Rocky Mountain region and Permian Basin, $18.0 million in higher average fee rates primarily in the Permian Basin and $10.9 million due primarily to lower rail transportation costs; and |
• | a decrease of $9.0 million in operating costs due primarily to lower employee-related costs and reduced spending on routine maintenance projects; offset partially by |
• | a decrease of $60.6 million in optimization and marketing due primarily to lower marketing earnings of $33.1 million due to the timing of purity NGL inventory sales and changes in the value of NGLs held in inventory and a decrease of $25.3 million related to narrower location price differentials. |
For the three months ended March 31, 2020, we recorded $70.2 million of noncash impairment charges related to certain inactive assets and a $7.2 million noncash impairment charge related to our 50% investment in Chisholm Pipeline Company. For additional information on our impairment charges, see Note A of the Notes to Consolidated Financial Statements in this Quarterly Report.
Capital expenditures increased for the three months ended March 31, 2020, compared with the same period in 2019, due primarily to spending on our capital-growth projects.
Selected Operating Information - The following table sets forth selected operating information for our Natural Gas Liquids segment for the periods indicated:
Three Months Ended | |||||||
March 31, | |||||||
Operating Information | 2020 | 2019 | |||||
Raw feed throughput (MBbl/d) (a) | 1,091 | 1,028 | |||||
Average Conway-to-Mont Belvieu OPIS price differential - ethane in ethane/propane mix ($/gallon) | $ | 0.01 | $ | 0.10 | |||
(a) - Represents physical raw feed volumes on which we charge a fee for transportation and/or fractionation services.
Volumes increased for the three months ended March 31, 2020, compared with the same period in 2019, due primarily to new and existing processing plants in the Rocky Mountain and Permian regions.
Natural Gas Pipelines
Overview - Our Natural Gas Pipelines segment, through its wholly owned assets, 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.
Selected Financial Results - The following table sets forth certain selected financial results and operating information for our Natural Gas Pipelines segment for the periods indicated:
Three Months Ended | Three Months | ||||||||||
March 31, | 2020 vs. 2019 | ||||||||||
Financial Results | 2020 | 2019 | Increase (Decrease) | ||||||||
(Millions of dollars) | |||||||||||
Transportation revenues | $ | 101.9 | $ | 94.0 | $ | 7.9 | |||||
Storage revenues | 16.5 | 18.9 | (2.4 | ) | |||||||
Residue natural gas sales and other revenues | 2.4 | 3.5 | (1.1 | ) | |||||||
Cost of sales and fuel (exclusive of depreciation and operating costs) | (1.5 | ) | (1.8 | ) | (0.3 | ) | |||||
Operating costs, excluding noncash compensation adjustments | (34.7 | ) | (34.2 | ) | 0.5 | ||||||
Equity in net earnings from investments | 28.6 | 27.1 | 1.5 | ||||||||
Other | (0.7 | ) | (0.9 | ) | 0.2 | ||||||
Adjusted EBITDA | $ | 112.5 | $ | 106.6 | $ | 5.9 | |||||
Capital expenditures | $ | 16.6 | $ | 28.7 | $ | (12.1 | ) | ||||
See reconciliation of net income (loss) to adjusted EBITDA in the “Adjusted EBITDA” section.
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Adjusted EBITDA increased $5.9 million for the three months ended March 31, 2020, compared with the same period in 2019, primarily as a result of an increase of $5.4 million from higher transportation services due primarily to higher firm transportation capacity contracted due to our completed expansion projects in 2019 and higher firm transportation rates.
Capital expenditures decreased for the three months ended March 31, 2020, compared with the same period in 2019, due primarily to the completion of our expansion projects in 2019.
Selected Operating Information - The following table sets forth selected operating information for our Natural Gas Pipelines segment for the periods indicated:
Three Months Ended | |||||
March 31, | |||||
Operating Information (a) | 2020 | 2019 | |||
Natural gas transportation capacity contracted (MDth/d) | 7,791 | 7,480 | |||
Transportation capacity contracted | 100 | % | 99 | % | |
(a) - Includes volumes for consolidated entities only.
Natural gas transportation capacity contracted increased for the three months ended March 31, 2020, compared with the same period in 2019, due to our completed expansion projects on our ONEOK Gas Transportation and WesTex Transmission systems in 2019, which are both substantially contracted.
Roadrunner, in which we have a 50% ownership interest, has contracted all of its westbound capacity through 2041.
Northern Border Pipeline, in which we have a 50% ownership interest, has contracted substantially all of its long-haul transportation capacity through the fourth quarter 2020.
In June 2019, our subsidiary, Viking Gas Transmission Company (Viking), filed a proposed change in rates pursuant to Section 4 of the Natural Gas Act with the FERC. In February 2020, Viking filed a Stipulation and Offer of Settlement with the FERC for approval. Pending approval by the FERC, the proposed settlement is not expected to materially impact our results of operations.
Adjusted EBITDA
Adjusted EBITDA is a non-GAAP measure of our financial performance. Adjusted EBITDA is defined as net income (loss) adjusted for interest expense, depreciation and amortization, noncash impairment charges, income taxes, allowance for equity funds used during construction, noncash compensation expense and other noncash items. We believe this non-GAAP financial measure is useful to investors because it and similar measures are used by many companies in our industry as a measurement of financial performance and is commonly employed by financial analysts and others to evaluate our financial performance and to compare financial performance among companies in our industry. Adjusted EBITDA should not be considered an alternative to net income (loss), earnings per share or any other measure of financial performance presented in accordance with GAAP. Additionally, this calculation may not be comparable with similarly titled measures of other companies.
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The following table sets forth a reconciliation of net income (loss), the nearest comparable GAAP financial performance measure, to adjusted EBITDA for the periods indicated:
Three Months Ended | ||||||||
March 31, | ||||||||
2020 | 2019 | |||||||
Reconciliation of net income (loss) to adjusted EBITDA | (Thousands of dollars) | |||||||
Net income (loss) | $ | (141,857 | ) | $ | 337,208 | |||
Add: | ||||||||
Interest expense, net of capitalized interest | 140,616 | 115,420 | ||||||
Depreciation and amortization | 132,353 | 114,158 | ||||||
Income tax expense (benefit) | (55,395 | ) | 77,934 | |||||
Impairment charges | 641,754 | — | ||||||
Noncash compensation expense | (1,302 | ) | 5,540 | |||||
Equity AFUDC and other noncash items | (15,409 | ) | (12,778 | ) | ||||
Adjusted EBITDA | $ | 700,760 | $ | 637,482 | ||||
Reconciliation of segment adjusted EBITDA to adjusted EBITDA | ||||||||
Segment adjusted EBITDA: | ||||||||
Natural Gas Gathering and Processing | $ | 159,648 | $ | 152,244 | ||||
Natural Gas Liquids | 410,916 | 377,639 | ||||||
Natural Gas Pipelines | 112,524 | 106,648 | ||||||
Other (a) | 17,672 | 951 | ||||||
Adjusted EBITDA | $ | 700,760 | $ | 637,482 | ||||
(a) - The three months ended March 31, 2020, includes a $15.8 million gain on extinguishment of debt related to open market repurchases.
CONTINGENCIES
See Note J of the Notes to Consolidated Financial Statements in this Quarterly Report for discussion of our legal proceedings.
LIQUIDITY AND CAPITAL RESOURCES
General - Our primary sources of cash inflows are operating cash flows, proceeds from our commercial paper program and our $2.5 Billion Credit Agreement, debt issuances and the issuance of common stock for our liquidity and capital resources requirements. In addition, we expect cash outflows for the remainder of 2020 related to (i) dividends paid to shareholders, (ii) capital expenditures and (iii) interest. We expect our cash outflows related to capital expenditures to decrease compared to prior year due to our completed capital-growth projects and capital-growth projects currently suspended and paused.
We expect our sources of cash inflows to provide sufficient resources to finance our operations, quarterly cash dividends and capital expenditures. We believe we have sufficient liquidity in this challenging market environment due to our $2.5 Billion Credit Agreement, which expires in June 2024, and cash on hand. We recently announced decreases to our expected 2020 capital spending by suspending and pausing several capital-growth projects that can quickly be resumed when market conditions improve.
We manage interest-rate risk through the use of fixed-rate debt, floating-rate debt and interest-rate swaps. For additional information on our interest-rate swaps, see Note C of the Notes to Consolidated Financial Statements in this Quarterly Report.
Guarantees and Cash Management - In March 2020, the SEC amended Rule 3-10 of Regulation S-X and created Rule 13-01 to simplify disclosure requirements related to certain registered securities. 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 information. The Intermediate Partnership holds all of ONEOK Partners’ interests and equity in its subsidiaries, which are non-guarantors. We do not have any material assets other than our ownership of all the interests in ONEOK Partners. Substantially all our material assets and operations reside with our non-guarantor operating
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subsidiaries. Therefore, as allowed under Rule 13-01, we have excluded the summarized financial information for each issuer and guarantor.
We use a centralized cash management program that concentrates the cash assets of our non-guarantor 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 March 31, 2020, we are in compliance with all covenants of the $2.5 Billion Credit Agreement.
At March 31, 2020, we had no borrowings under our $2.5 Billion Credit Agreement and $531.6 million of cash and cash equivalents.
As of March 31, 2020, we had a working capital surplus of $396.9 million (defined as current assets less current liabilities). Generally, our working capital is influenced by several factors, including, among other things: (i) the timing of (a) debt and equity issuances, (b) the funding of capital expenditures, (c) scheduled debt payments, and (d) the collection and payment of accounts receivable and payable; and (ii) the volume and cost of inventory and commodity imbalances. We may have working capital deficits in future periods as we continue to finance our capital-growth projects and repay long-term debt.
For additional information on our $2.5 Billion Credit Agreement, see Note D of the Notes to Consolidated Financial Statements in this Quarterly Report.
Long-term Financing - In addition to our principal sources of short-term liquidity discussed above, we expect to fund our longer-term financing requirements by issuing long-term notes. Other options to obtain financing include, but are not limited to, 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.
Debt Issuances - In early March 2020, we completed an underwritten public offering of $1.75 billion senior unsecured notes consisting of $400 million, 2.2% senior notes due 2025; $850 million, 3.1% senior notes due 2030; and $500 million, 4.5% senior notes due 2050. The net proceeds, after deducting underwriting discounts, commissions and offering expenses, were $1.73 billion. A portion of the proceeds were used to pay all outstanding amounts under our commercial paper program. The remainder was, and will be, used for general corporate purposes, which may include repayment of other existing indebtedness and funding capital expenditures.
Debt Repayments - In March 2020, we repurchased in the open market $67.0 million outstanding principal of certain of our senior notes for an aggregate repurchase price of $50.5 million with cash on hand. In connection with these open market repurchases, we recognized a $15.8 million gain on extinguishment of debt, which is included in other income in our Consolidated Statement of Income for the three months ended March 31, 2020. We may continue to repurchase debt securities issued by us and our affiliates in the future through open market purchases, privately negotiated transactions, tender offers, exchange offers, or otherwise, upon such terms and at such prices as we may from time to time determine for cash or other consideration.
For additional information on our long-term debt, see Note D of the Notes to Consolidated Financial Statements in this Quarterly Report.
Capital Expenditures - We classify expenditures that are expected to generate additional revenue, return on investment or significant operating efficiencies as capital-growth expenditures. Maintenance capital expenditures are those capital expenditures required to maintain our existing assets and operations and do not generate additional revenues. Maintenance capital expenditures are made to replace partially or fully depreciated assets, to maintain the existing operating capacity of our assets and to extend their useful lives. Our capital expenditures are financed typically through operating cash flows and short- and long-term debt.
Capital expenditures, excluding AFUDC and capitalized interest, were $949.7 million and $889.7 million for the three months ended March 31, 2020 and 2019, respectively.
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We expect our total 2020 growth-capital expenditures to range from $1.4 billion to $1.8 billion and our maintenance capital expenditures to range from $130 million to $170 million, excluding AFUDC and capitalized interest. See discussion of our announced capital-growth projects in the “Recent Developments” section.
Credit Ratings - Our long-term debt credit ratings as of April 20, 2020, are shown in the table below:
Rating Agency | Long-Term Rating | Short-Term Rating | Outlook |
Moody’s | Baa3 | Prime-3 | Positive |
S&P | BBB | A-2 | Stable |
Our credit ratings, which are investment grade, may be affected by a material change in our financial ratios or a material event affecting our business and industry. Although we are in the midst of a challenging market environment, our credit ratings have not been affected. The most common criteria for assessment of our credit ratings are the debt-to-EBITDA ratio, interest coverage, business risk profile and liquidity. If our credit ratings were downgraded, our cost to borrow funds under our $2.5 Billion Credit Agreement and our $1.5 Billion Term Loan Agreement would increase and a potential loss of access to the commercial paper market could occur. In the event that we are unable to borrow funds under our commercial paper program and there has not been a material adverse change in our business, we would continue to have access to our $2.5 Billion Credit Agreement, which expires in 2024. An adverse credit rating change alone is not a default under our $2.5 Billion Credit Agreement or our $1.5 Billion Term Loan Agreement.
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 2020, we paid a dividend of $0.935 per share ($3.74 per share on an annualized basis), an increase of 9% compared with the same quarter in the prior year. A dividend of $0.935 per share was declared for the shareholders of record at the close of business on April 27, 2020, payable May 14, 2020.
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 2020. Dividends totaling $0.3 million were declared for the Series E Preferred Stock and are payable May 14, 2020.
For the three months ended March 31, 2020, cash flows from operations exceeded cash dividends paid by $36.1 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 short- and long-term debt, as necessary or appropriate.
CASH FLOW ANALYSIS
We use the indirect method to prepare our Consolidated Statements of Cash Flows. Under this method, we reconcile net income (loss) to cash flows provided by operating activities by adjusting net income (loss) for those items that affect net income (loss) but do not result in actual cash receipts or payments during the period and for operating cash items that do not impact net income (loss). 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 | |||||||||||
Three Months Ended | 2020 vs. 2019 | ||||||||||
March 31, | Favorable (Unfavorable) | ||||||||||
2020 | 2019 | ||||||||||
(Millions of dollars) | |||||||||||
Total cash provided by (used in): | |||||||||||
Operating activities | $ | 422.7 | $ | 353.6 | $ | 69.1 | |||||
Investing activities | (964.8 | ) | (864.8 | ) | (100.0 | ) | |||||
Financing activities | 1,052.7 | 527.0 | 525.7 | ||||||||
Change in cash and cash equivalents | 510.6 | 15.8 | 494.8 | ||||||||
Cash and cash equivalents at beginning of period | 21.0 | 12.0 | 9.0 | ||||||||
Cash and cash equivalents at end of period | $ | 531.6 | $ | 27.8 | $ | 503.8 | |||||
Operating Cash Flows - Operating cash flows are affected by earnings from our business activities and changes in our operating assets and liabilities. Changes in commodity prices and demand for our services or products, whether because of general economic conditions, changes in supply, changes in demand for the end products that are made with our products or increased competition from other service providers, could affect our earnings and operating cash flows. Our operating cash flows can also be impacted by changes in our 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 three months ended March 31, 2020, increased $29.2 million, compared with the same period in 2019. This increase is due primarily to higher earnings resulting from volume growth primarily in the Rocky Mountain region and the Permian Basin in our Natural Gas Liquids segment, as discussed in “Financial Results and Operating Information.”
The changes in operating assets and liabilities decreased operating cash flows $120.2 million for the three months ended March 31, 2020, compared with a decrease of $160.1 million for the same period in 2019. This change is due primarily to the change in accounts receivable, accounts payable, and other accruals and deferrals resulting from the timing of receipt of cash from customers and payments to vendors, suppliers and other third parties, as well as changes in the fair value of risk-management assets and liabilities and NGLs and natural gas in storage, which vary from period to period and with changes in commodity prices. The fair value of risk-management assets and liabilities are also impacted by changes in interest rates.
Investing Cash Flows - Cash used in investing activities for the three months ended March 31, 2020, increased $100.0 million compared with the same period in 2019, due primarily to capital expenditures related to our capital-growth projects.
Financing Cash Flows - Cash from financing activities for the three months ended March 31, 2020, increased $525.7 million compared with the same period in 2019, due primarily to the repayment of long-term debt in 2019 and the issuance of $1.75 billion in senior unsecured notes in March 2020 compared with $1.45 billion of debt issuances in 2019, offset partially by the repayment of short-term borrowings.
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. For example, if a leak or spill of hazardous substances or petroleum products occurs from pipelines or facilities that we own, operate or otherwise use, we could be held jointly and severally liable for all resulting liabilities, including response, investigation and cleanup costs, which could affect adversely our results of operations and cash flows. In addition, emissions controls and/or other regulatory or permitting mandates under the Clean Air Act and other similar federal and state laws could require unexpected capital expenditures at our facilities. We cannot assure that
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existing environmental statutes and regulations will not be revised or that new regulations will not be adopted or become applicable to us.
Additional information about our regulatory, environmental and safety matters can be found in “Regulatory, Environmental and Safety Matters” under Part I, Item 1, Business, in our Annual Report.
IMPACT OF NEW ACCOUNTING STANDARDS
See Note A of the Notes to Consolidated Financial Statements in this Quarterly Report for discussion of new accounting standards.
ESTIMATES AND CRITICAL ACCOUNTING POLICIES
The preparation of our Consolidated Financial Statements and related disclosures in accordance with GAAP requires us to make estimates and assumptions with respect to values or conditions that cannot be known with certainty that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities at the date of the Consolidated Financial Statements. These estimates and assumptions also affect the reported amounts of revenue and expenses during the reporting period. Although we believe these estimates and assumptions are reasonable, actual results could differ from our estimates.
Information about our estimates and critical accounting policies is included under Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, “Estimates and Critical Accounting Policies,” in our Annual Report.
FORWARD-LOOKING STATEMENTS
Some of the statements contained and incorporated in this Quarterly Report are forward-looking statements as defined under federal securities laws. The forward-looking statements relate to our anticipated financial performance (including projected operating income, net income, capital expenditures, cash flows and projected levels of dividends), liquidity, management’s plans and objectives for our future capital-growth projects and other future operations (including plans to construct additional natural gas and NGL pipelines, 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 include the items identified in the preceding paragraph, the information concerning possible or assumed future results of our operations and other statements contained or incorporated in this Quarterly Report identified by words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “forecast,” “goal,” “guidance,” “intend,” “may,” “might,” “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 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 on the pipelines that transport crude oil, natural gas and NGLs from producing areas and our facilities; |
• | the effects of weather and other natural phenomena, including climate change, on our operations, demand for our services and energy prices; |
• | the length and severity of a pandemic or other health crisis, such as the recent outbreak of COVID-19 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;
• | 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 recent agreements to reduce production volumes; |
• | economic climate and growth in the geographic areas in which we do business; |
• | risks associated with adequate supply to our gathering, processing, fractionation and pipeline facilities, including production declines that outpace new drilling or extended periods of ethane rejection; |
• | 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; |
• | demand for our services and products in the proximity of our facilities; |
• | the ability to market pipeline capacity on favorable terms, including the effects of: |
– | future demand for and prices of natural gas, NGLs and crude oil; |
– | competitive conditions in the overall energy market; |
– | availability of supplies of United States natural gas and crude oil; and |
– | availability of additional storage capacity; |
• | acts of nature, sabotage, terrorism or other similar acts that cause damage to our facilities or our suppliers’, customers’ or shippers’ facilities; |
• | the possibility of future terrorist attacks or the possibility or occurrence of an outbreak of, or changes in, hostilities or changes in the political conditions throughout the world; |
• | the timely receipt of approval by applicable governmental entities for construction and operation of our pipeline and other projects and required regulatory clearances; |
• | our ability to acquire all necessary permits, consents or other approvals in a timely manner, to promptly obtain all necessary materials and supplies required for construction, and to construct gathering, processing, storage, fractionation and transportation facilities without labor or contractor problems; |
• | the profitability of assets or businesses acquired or constructed by us; |
• | 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; |
• | risks of marketing, trading and hedging activities, including the risks of changes in energy prices or the financial condition of our counterparties; |
• | the uncertainty of estimates, including accruals and costs of environmental remediation; |
• | changes in demand for the use of natural gas, NGLs and crude oil because of market conditions caused by concerns about climate change; |
• | the impact of uncontracted capacity in our assets being greater or less than expected; |
• | the composition and quality of the natural gas and NGLs we gather and process in our plants and transport on our pipelines; |
• | the efficiency of our plants in processing natural gas and extracting and fractionating NGLs; |
• | our ability to control construction costs and completion schedules of our pipelines and other projects; |
• | the effects of changes in governmental policies and regulatory actions, including changes with respect to income and other taxes, pipeline safety, environmental compliance, climate change initiatives, production limits and authorized rates of recovery of natural gas and natural gas transportation costs; |
• | 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 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, the PHMSA, the EPA and the CFTC; |
• | difficulties or delays experienced by trucks, railroads or pipelines in delivering products to or from our terminals or pipelines; |
• | the capital-intensive nature of our businesses; |
• | the mechanical integrity of facilities operated; |
• | 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 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; |
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• | our indebtedness and guarantee obligations could make us vulnerable to general adverse economic and industry conditions, limit our ability to borrow additional funds and/or place us at competitive disadvantages compared with our competitors that have less debt or have other adverse consequences; |
• | actions by rating agencies concerning our credit; |
• | our ability to access capital at competitive rates or on terms acceptable to us; |
• | the impact and outcome of pending and future litigation; |
• | performance of contractual obligations by our customers, service providers, contractors and shippers; |
• | our ability to control operating costs and make cost-saving changes; |
• | the impact of recently issued and future accounting updates and other changes in accounting policies; |
• | the risk of increased costs for insurance premiums, security or other items as a consequence of terrorist attacks; |
• | the risk inherent in the use of information systems in our respective businesses and those of our counterparties and service providers, implementation of new software and hardware, and the impact on the timeliness of information for financial reporting; |
• | the impact of potential impairment charges; and |
• | the risk factors listed in the reports we have filed and may file with the SEC, which are incorporated by reference. |
These factors are not necessarily all of the important factors that could cause actual results to differ materially from those expressed in any of our forward-looking statements. Other factors could also 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.
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 established policies and procedures to monitor our natural gas, condensate and NGL marketing activities and interest rates to ensure our hedging activities mitigate market risks. We do not use financial instruments for trading purposes.
COMMODITY PRICE RISK
As part of our hedging strategy, we use commodity derivative financial instruments and physical-forward contracts described in Note C of the Notes to Consolidated Financial Statements in this Quarterly Report to reduce the impact of near-term price fluctuations of natural gas, NGLs and condensate.
Although our businesses are primarily fee-based, in our Natural Gas Gathering and Processing segment, we are exposed to commodity price risk as a result of retaining a portion of the commodity sales proceeds associated with our POP with fee contracts. Under certain POP with fee contracts, our contractual fees and POP percentage may increase or decrease if production volumes, delivery pressures or commodity prices change relative to specified thresholds. We are exposed to basis risk between the various production and market locations where we buy and sell commodities. In the current commodity price environment, our contractual fees on these contracts have decreased, which impacts the average fee rate in our Natural Gas Gathering and Processing segment. If the current commodity price environment continues, we expect this commodity price exposure to continue.
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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:
Nine Months Ending December 31, 2020 | |||||||||
Volumes Hedged | Average Price | Percentage Hedged | |||||||
NGLs - excluding ethane (MBbl/d) - Conway/Mont Belvieu | 10.3 | $ | 0.55 | / gallon | 71% | ||||
Condensate (MBbl/d) - WTI-NYMEX | 2.9 | $ | 54.08 | / Bbl | 72% | ||||
Natural gas (BBtu/d) - NYMEX and basis | 124.9 | $ | 2.39 | / MMBtu | 86% | ||||
Year Ending December 31, 2021 | |||||||||
Volumes Hedged | Average Price | Percentage Hedged | |||||||
Natural gas (BBtu/d) - NYMEX and basis | 66.4 | $ | 2.41 | / MMBtu | 50% | ||||
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 March 31, 2020. 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 nine months ending December 31, 2020, and for the year ending December 31, 2021, by approximately $1.7 million and $2.6 million, respectively; |
• | a $1.00 per-barrel change in the price of crude oil would change adjusted EBITDA for the nine months ending December 31, 2020, and for the year ending December 31, 2021, by approximately $1.0 million and $1.5 million, respectively; and |
• | a $0.10 per-MMBtu change in the price of residue natural gas would change adjusted EBITDA for the nine months ending December 31, 2020, and for the year ending December 31, 2021, by approximately $4.0 million and $4.9 million, respectively. |
These estimates do not include any effects of hedging or effects on demand for our services or natural gas processing plant operations that might be caused by, or arise in conjunction with, commodity price fluctuations. For example, a change in the gross processing spread may cause a change in the amount of ethane extracted from the natural gas stream, impacting gathering and processing financial results for certain contracts.
INTEREST-RATE RISK
We are exposed to interest-rate risk through borrowings under our $2.5 Billion Credit Agreement, $1.5 Billion Term Loan Agreement, commercial paper program and long-term debt issuances. Future increases in LIBOR or the established replacement rate, commercial paper rates or bond rates could expose us to increased interest costs on future borrowings. We manage interest-rate risk through the use of fixed-rate debt, floating-rate debt and interest-rate swaps. Interest-rate swaps are agreements to exchange interest payments at some future point based on specified notional amounts. In March 2020, we settled $750 million of our forward-starting interest-rate swaps related to our underwritten public offerings of $1.75 billion senior unsecured notes.
At March 31, 2020, and December 31, 2019, we had forward-starting interest-rate swaps with notional amounts totaling $1.1 billion and $1.8 billion, respectively, to hedge the variability of interest payments on a portion of our forecasted debt issuances. At March 31, 2020, and December 31, 2019, we had interest-rate swaps with notional amounts totaling $1.3 billion to hedge the variability of our LIBOR-based interest payments. All of our interest-rate swaps are designated as cash flow hedges.
See Note C of the Notes to Consolidated Financial Statements in this Quarterly Report for more information on our hedging activities.
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.
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The creditworthiness of our counterparties, which are primarily investment grade, and our customer concentration are consistent with those discussed in Part II, Item 7A, Quantitative and Qualitative Disclosures about Market Risk, in our Annual Report.
ITEM 4. | CONTROLS AND PROCEDURES |
Quarterly Evaluation of Disclosure Controls and Procedures - Our Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer) have concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report based on the evaluation of the controls and procedures required by Rules 13a-15(e) and 15d-15(e) of the Exchange Act.
Changes in Internal Control Over Financial Reporting - There have been no changes in our internal control over financial reporting during the quarter ended March 31, 2020, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. | LEGAL PROCEEDINGS |
Additional information about our legal proceedings is included in Note J of the Notes to Consolidated Financial Statements in this Quarterly Report and under Note N of the Notes to Consolidated Financial Statements in our Annual Report.
ITEM 1A. | RISK FACTORS |
The spread of COVID-19, recent energy industry developments and the resulting impact on business and economic conditions may affect adversely our operating results.
The spread of COVID-19 has led to global and regional economic disruption, volatility in the financial markets and a weakened commodity price environment. It is possible that the continued spread of COVID-19 and efforts to contain the virus, such as quarantines, closures and reduced operations of businesses will have a continued adverse impact on global and regional economic conditions, which could further impact (i) the supply and demand for NGLs and natural gas, (ii) our ability to efficiently and effectively operate our business as our employees are subject to stay-at-home and social distancing restrictions, (iii) our suppliers of materials, equipment and services or (iv) our access to capital markets. The spread of COVID-19 may also cause other unpredictable or unforeseen events that may affect adversely our operating results. Volatility in commodity prices may have an impact on many of our counterparties, which, in turn, could have a negative impact on their ability to meet their obligations to us. For example, in March 2020, unsuccessful negotiations between the Organization of the Petroleum Exporting Countries (OPEC) and Russia regarding crude oil production cuts resulted in a price war between Saudi Arabia and Russia. As a result, the global supply of crude oil significantly exceeded demand and led to a collapse in crude oil prices. However, further negotiations in April 2020 resulted in an agreement to reduce production volumes. Failure to abide by these agreed upon crude oil production cuts may further destabilize the global oil market, which is simultaneously experiencing a limitation on crude oil storage capacity and a dramatic decrease in demand due to COVID-19, and crude oil prices may continue to decline. In addition to these global developments, several of the states where we operate are considering imposing limits on oil production, which could further impact our volume expectations. If adverse global or regional economic and market conditions remain uncertain or persist, spread or deteriorate further, we may experience a material adverse impact on our business, results of operations, financial position, cash flows and/or liquidity.
Our investors should consider additional risks set forth in Part I, Item 1A, Risk Factors, of our Annual Report that could affect us and our business. Additionally the impact of the COVID-19 pandemic could exacerbate many of the risks identified in our Annual Report. 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. Even after the COVID-19 pandemic has moderated and business and social distancing restrictions have eased, we may continue to experience similar adverse effects to our businesses, operating results, cash flows and/or financial condition resulting from economic slowdown that is expected to persist. 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.
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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 | |
4.1 | |
4.2 | |
4.3 | |
10.1 | |
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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 (formatted in Inline XBRL 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 months ended March 31, 2020 and 2019; (iii) Consolidated Statements of Comprehensive Income for the three months ended March 31, 2020 and 2019; (iv) Consolidated Balance Sheets at March 31, 2020, and December 31, 2019; (v) Consolidated Statements of Cash Flows for the three months ended March 31, 2020 and 2019; (vi) Consolidated Statements of Changes in Equity for the three months ended March 31, 2020 and 2019; 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: April 29, 2020 | By: | /s/ Walter S. Hulse III |
Walter S. Hulse III | ||
Chief Financial Officer, Treasurer and | ||
Executive Vice President, Strategic Planning | ||
and Corporate Affairs | ||
(Principal Financial Officer) | ||
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