WASHINGTON, D.C. 20549
For the transition period from __________ to __________.
ONEOK, Inc.
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. (Check one)
Aggregate market value of registrant’s common stock held by non-affiliates based on the closing trade price on June 30, 2018,2020, was $28.3$14.5 billion.
Portions of the definitive proxy statement to be delivered to shareholders in connection with the Annual Meeting of Shareholders to be held May 22, 2019,26, 2021, are incorporated by reference in Part III.
ONEOK, Inc.
20182020 ANNUAL REPORT
As used in this Annual Report, references to “we,” “our,” or “us” refer to ONEOK, Inc., an Oklahoma corporation, and its predecessors and subsidiaries, unless the context indicates otherwise.
GLOSSARY
The abbreviations, acronyms and industry terminology used in this Annual 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, 20182020 |
ASU | Accounting Standards Update |
Bbl | Barrels, 1 barrel is equivalent to 42 United States gallons |
Bbl/BBtu/d | Barrels per day |
BBtu/d | Billion British thermal units per day |
Bcf | Billion cubic feet |
Bcf/d | Billion cubic feet per day |
CFTC | |
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 |
Clean Water Act | Federal Water Pollution Control Act Amendments of 1972, as amended |
DJCOVID-19 | Denver-JulesburgCoronavirus disease 2019 |
DOTDJ | Denver-Julesburg |
DOT | United States Department of Transportation |
EBITDA | Earnings before interest expense, income taxes, depreciation and amortization |
EPA | United States Environmental Protection Agency |
EPS | Earnings per share of common stock |
Exchange Act | Securities Exchange Act of 1934, as amended |
FERC | Federal Energy Regulatory Commission |
FoundationFitch | ONEOK Foundation,Fitch Ratings, Inc. |
GAAP | Accounting principles generally accepted in the United States of America |
GHG | Greenhouse gas |
ICE | Intercontinental Exchange |
Intermediate Partnership | ONEOK Partners Intermediate Limited Partnership, a wholly owned subsidiary of ONEOK Partners, L.P. |
KCC | Kansas Corporation Commission |
LIBOR | London Interbank Offered Rate |
MBbl/d | Thousand barrels per day |
MDth/d | Thousand dekatherms per day |
Merger TransactionMMBbl | The transaction, effective June 30, 2017, in which ONEOK acquired all of ONEOK Partners’ outstanding common units not already directly or indirectly owned by ONEOKMillion barrels |
MMBblMMBbl/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 |
Natural Gas Policy Act | Natural Gas Policy Act of 1978, 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 |
NYMEXNorthern Border Pipeline | Northern Border Pipeline Company, a 50% owned joint venture |
NYMEX | New York Mercantile Exchange |
NYSE | New York Stock Exchange |
OCC | Oklahoma Corporation Commission |
ONEOK | ONEOK, Inc. |
ONEOK Partners | ONEOK Partners, L.P., a wholly owned subsidiary of ONEOK, Inc. |
ONEOK Partners Term Loan Agreement | The senior unsecured three-year $1.0 billion term loan agreement dated January 8, 2016, as amended |
OPIS | | | | | |
ONEOK West Texas NGL | ONEOK West Texas NGL pipeline and Mesquite pipeline (formerly known as West Texas LPG pipeline and Mesquite pipeline) |
OPIS | Oil Price Information Service |
OSHAOverland Pass Pipeline | Occupational Safety and Health Administration |
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 percent-owned50% owned joint venture |
RRC | Railroad Commission of Texas |
S&P | S&P Global Ratings |
SCOOP | South Central Oklahoma Oil Province, an area in the Anadarko Basin in Oklahoma |
SEC | Securities and Exchange Commission |
Securities Act | Securities Act of 1933, as amended |
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 |
Tax Cuts and Jobs Act | H.R. 1, the tax reform bill, signed into law on December 22, 2017 |
Topic 606 | Accounting Standards Update 2014-09, “Revenue from Contracts with Customers” |
West Texas LPGWTI | West Texas LPG pipeline and Mesquite pipeline |
WTI | West Texas Intermediate |
WTLPGXBRL | West Texas LPG Pipeline Limited Partnership |
XBRL | eXtensible Business Reporting Language |
The statements in this Annual 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,” “project,“forecast,” “goal,” “guidance,” “intend,” “may,” “might,” “outlook,” “plan,” “believe,“potential,” “project,” “scheduled,” “should,” “goal,“will,” “forecast,” “guidance,” “could,” “may,” “continue,” “might,” “potential,” “scheduled”“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 1A, Risk Factors, and Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations and “Forward-Looking Statements,” in this Annual Report.
PART I
ITEM 1. BUSINESS
GENERAL
We are a corporation incorporated under the laws of the state of Oklahoma, and our common stock is listed on the NYSE under the trading symbol “OKE.” We are a leading midstream service provider and own one of the nation’s premier natural gas liquidsNGL systems, connecting NGL supply in the Mid-Continent,Rocky Mountain, Permian and Rocky MountainMid-Continent regions with key market centers and an extensive network of natural gas gathering, processing, storage and transportation assets. We apply our core capabilities of gathering, processing, fractionating, transporting, storing and marketing natural gas and NGLs through vertical integration across the midstream value chain to provide our customers with premium services while generating consistent and sustainable earnings growth.
Midstream Value Chain
| | | | | | | | | | | | | | | | | |
| Legend | | | |
| | | | We are connected to supply in natural gas and NGL producing basins and have significant basin diversification, including the Williston, Permian, Powder River and DJ Basins and the STACK and SCOOP areas. In our Natural Gas Gathering and Processing segment, we have more than 3 million dedicated acres in the Williston Basin and approximately 300,000 dedicated acres in the STACK and SCOOP areas. In our Natural Gas Liquids segment, we are the largest NGL takeaway provider in the Williston and Powder River Basins; Oklahoma, including the STACK and SCOOP areas; Kansas; and the Texas Panhandle. We also have a significant presence in the Permian Basin.
|
| | Natural Gas Gathering & Processing | |
| | | |
| | Natural Gas Liquids | |
| | | |
| | Natural Gas Pipelines | |
| | | |
| | | |
Raw natural gas is typically gathered at the wellhead, compressed and transported through pipelines to our processing facilities. Most raw natural gas produced at the wellhead contains a mixture of NGL components, including ethane, propane, iso-butane, normal butane and natural gasoline. | |
|
|
|
|
|
|
| | | | |
Gathered wellhead natural gas is directed to our processing plants to remove NGLs, resulting in residue natural gas (primarily methane). | | Once processed, residue natural gas is recompressed and delivered to intrastate and interstate natural gas pipelines primarily in our Natural Gas Pipelines segment. |
|
|
|
| | | | |
| | | |
| | | |
| | | |
| | | |
NGLs extracted at processing plants, both third-party and our own, are then gathered by our NGL gathering pipelines. | |
|
|
| | | |
| | | |
| | | |
| | | |
| | | |
Gathered NGLs are directed to our downstream fractionators in the Mid-Continent region and Mont Belvieu, Texas, to be separated into purity products. | |
|
|
| |
| | | | Residue natural gas is transported to storage facilities and end users, such as large industrial customers, natural gas and electric utilities serving commercial and residential consumers, and international markets through liquefied natural gas exports and cross-border pipelines.
|
| | | |
| | | |
| | | |
| | | |
| | | |
Purity products are stored or distributed to our customers, such as petrochemical companies, propane distributors, heating fuel users, ethanol producers, refineries and exporters. | | |
| |
| |
| |
| | | | |
EXECUTIVE SUMMARY
Merger TransactionBusiness Update, Market Conditions and COVID-19 - On June 30, 2017, we completedLate in the acquisitionfirst quarter 2020, the energy industry experienced historic events that led to a simultaneous demand and supply disruption. The World Health Organization declared 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 allcrude 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. Crude oil prices and the related impact on crude oil drilling impacts our business due to associated natural gas, which is natural gas produced by oil wells. Associated natural gas contains NGLs. The decline of crude oil prices resulted in crude oil and associated natural gas and NGL production being curtailed in the second quarter 2020. We are still experiencing global and regional economic disruptions due primarily to COVID-19; however, in the third quarter 2020, many of our producers reversed curtailments, bringing volumes back to pre-COVID-19 levels as prices and demand significantly improved from second quarter 2020 lows. The full impact of the outstanding common unitscontinued global and regional economic disruption will depend on the unknown duration and severity of ONEOK Partners that we did not already own. PriorCOVID-19 and, among other things, the impact of governmental actions imposed in response to June 30, 2017, weCOVID-19, the pace and scale of economic recovery and corresponding demand for crude oil and the impacts to commodity prices. We continue to monitor producers’ drilling, completion and production plans, which are increasingly positive as commodity prices have stabilized and improved, and our subsidiaries owned allexpectations for 2021 include the potential for an improving pace of the general partner interest, which included incentive distribution rights,drilling and completion activity.
The energy industry has experienced many up and down cycles, and as a portion of the limited partner interest, which together represented a 41.2 percent ownership interest in ONEOK Partners. The earnings of ONEOK Partners that are attributedresult, we have positioned ourselves to its units held by the public during the six months ended June 30, 2017, are reported as “Net income attributableminimize exposure to noncontrolling interests” in our Consolidated Statement of Income. Our general partner incentive distribution rights effectively terminated at the closing of the Merger Transaction.
Business Update and Market Conditions - We operate primarily fee-based businesses in eachdirect commodity price volatility. Each of our three reportable segments,segments’ earnings are primarily fee-based, and our consolidated earnings were nearly 90 percentmore than 90% fee-based in 2018. We2020. While our Natural Gas Gathering and Processing segment’s earnings are connectedprimarily fee-based, we have direct commodity price exposure related primarily to supply in growing basinsfee with POP contracts. Under certain fee with POP contracts, our contractual fees and have significant basin diversification, including the Williston, Permian, Powder River and DJ Basins and the STACK and SCOOP areas. WhilePOP 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. Our exposure to volumetric risk can result from declining well productivity, reduced drilling activity, severe weather disruptions, operational outages and ethane rejection. Commodity prices decreased in the fourth quarter 2018 and are expected to fluctuate in 2019. However, we do not expect supply volumes in our three business segments to be materially impacted.
Volumes increased across our operating regions in our Natural Gas Gathering and Processing and Natural Gas Liquids segments in 2018, compared with 2017, as a result of improvedproduction curtailments, reduced drilling and completion activity, declining well productivity, severe weather disruption, operational outages and crude oil, prices, producers experiencing improved drilling economics and continued improvements in production due to enhanced completion techniques. In addition, we experienced increased demand for NGL products from petrochemical and NGL export facilities in the Gulf Coast. We have spent approximately $2 billion of our announced $6 billion of capital-growth projects that include NGL pipelines, NGL fractionators and natural gas processing plants supporteddemand. Our Natural Gas Pipelines segment is not exposed to significant volumetric risk due to nearly all of our capacity being subscribed under long-term firm fee-based contracts.
In continued response to COVID-19, we remain committed to managing the impact of the pandemic on our employees. We continue to take actions for safe operations, to protect our workforce and to implement appropriate cost reduction measures. We reduced our 2020 capital-growth expenditures by approximately $1.7 billion, compared with 2019, driven primarily by our previously completed, paused and suspended capital-growth projects. We also significantly reduced our operating expenses in 2020, compared with 2019, primarily as a combinationresult of long-term primarily fee-based contracts, volume commitments and/or acreage dedications. Our NGL projectsreduced outside services from contractors, asset optimizations and lower employee-related costs. As always, we remain focused on operating our assets safely, reliably and in an environmentally responsible manner. 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 has remained fully engaged in the Gulf Coast also allow flexibilitymidst of federal, state and local government issued guidelines and safety-related ordinances. We continue to construct additional NGL fractionators, storagepractice remote work procedures when possible to protect the safety of our employees and potentially, new export facilitiestheir families and have taken extra precautions for our employees who work in the future.field or need to report to a ONEOK facility, such as increased facility access restrictions, workspace modifications, social distancing, face covering protocols and sanitation procedures. We continue to apply risk-management and cybersecurity measures designed so that our systems remain functional in order to both serve our operational needs and to provide service to our customers. In the first quarter 2020, the CARES Act was signed into law in response to the COVID-19 pandemic, and we opted into the CARES Act payroll tax deferral program, which will modestly benefit us, and the 401(k) penalty-free hardship withdrawal and loan deferral programs for our employees.
In 2020, due to the 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 incurred $644.9 million in noncash impairment charges, which had an adverse impact on our financial results for the year ended December 31, 2020. We expect these projects to meet the needs of natural gas processorsmaintain sufficient liquidity and producers and the petrochemical industry that require additional midstream infrastructure to accommodate increasing supply and demand in the areas in which we operate.
For most of 2018, we benefited from favorable NGL price differentials as available pipeline and fractionation capacity in and between the Conway, Kansas, and Mont Belvieu, Texas, market centers tightenedfinancial stability into 2021 due to growing NGL supply from the Mid-Continent and Rocky Mountain regions, combined with increased petrochemical and NGL export demand in the Gulf Coast, resulting in higher earningscash on hand from our Natural Gas Liquids segment’s optimizationJune 2020 equity issuance, cash flows from operations and marketing activities. In the fourth quarter 2018, these differentials narrowed resulting from seasonality of supplyaccess to our undrawn $2.5 Billion Credit Agreement.
See Part II, Item 7A, Quantitative and demand in the Mid-Continent region, lower commodity prices and additional pipeline and fractionation capacity resulting from operational efficiencies. While we expect NGL price differentials to be volatile in 2019, we expect that they will be wider than historical norms due to additional demand in the Gulf Coast, additional NGL supply growth in the Mid-Continent region and continuing fractionation and pipeline constraints. We expect these wider NGL price differentials to continue until announced NGL pipeline and fractionation infrastructure projects, including our Arbuckle II pipeline, are completed in early 2020.
Rocky Mountain Region - We expect each of our business segments to benefit from increased productionQualitative Disclosures About Market Risk, in this region, which includes the Williston, Powder River and DJ Basins.Annual Report for more information on our exposure to market risk.
Natural Gas - In our Natural Gas Gathering and Processing segment, our gatheringgathered and processing capacity of 1.1 Bcf/d in this region allows us to capture natural gas from the more than 1 million acres dedicated to us in the core of the Williston Basin and approximately 3 million acres throughout the entire basin. Natural gas gathered and
processed volumes decreased in this region increased in 2018,2020, compared with 2017,2019, due primarily to new supplynatural production declines in the Mid-Continent region. Production curtailments from many of our crude oil and natural gas producers impacted volumes in the second quarter 2020, however in the third quarter 2020, many of our producers returned production and our captured natural gas returned to pre-COVID-19 levels as commodity prices strengthened. We expect to maintain pre-COVID-19 volume levels in the Rocky Mountain region through 2021, assuming no increase in producer activity, due to the completion of previously drilled but uncompleted wells, the capture of natural gas previously flared and rising gas-to-oil ratios. In addition, as prices and volumes continue to strengthen, we have the processing capacity to benefit from production growth projects. With continued volume growth expectedwithout significant capital investment due to improved drilling economics and producer efficiencies, we are constructingthe completion of our Demicks Lake I and Demicks Lake II natural gas processing plants. These projects will provide an additional 400 MMcf/d of processing capacityplants, which were placed in the core of the Williston Basin, helping producers meet North Dakota’s natural gas capture targets and adding incremental NGLs to our NGL gathering system and supplying natural gas to our 50 percent-owned Northern Border Pipeline. Our Demicks Lake I plant is expected to reach capacity soon after its completionservice in the fourth quarter 2019 due to more than 250 MMcf/d of natural gas currently flaring on our dedicated acreage due primarily to lack of processing capacity. In our Natural Gas Liquids segment,and the volume growth in this region has resulted in the Overland Pass pipeline, of which we own 50 percent, and our Bakken NGL pipeline operating at or near full capacities. We are constructing our Elk Creek pipeline to support expected supply growth and provide needed infrastructure to transport NGLs out of the region to the Mid-Continent with connectivity to the Gulf Coast. We expect the southern section of our Elk Creek pipeline to be in service as early as the thirdfirst quarter 2019, which would allow NGL production from the Powder River Basin to be transported on this section of pipeline before the entire Elk Creek pipeline project is complete. As a result, we expect capacity will be available on our Bakken NGL pipeline to transport additional NGL volumes from the Williston Basin.
STACK and SCOOP - As producers continue to develop the STACK and SCOOP areas in Oklahoma, we expect increased demand for our services from producers that need incremental takeaway capacity for natural gas and NGLs out of the Mid-Continent region. In our Natural Gas Gathering and Processing segment, natural gas gathered and processed volumes increased in 2018, compared with 2017, due to increased producer activity in these areas, where we have sizable acreage dedications. In response to this increased activity, we completed the 200 MMcf/d expansion of our Canadian Valley natural gas processing plant, which2020, respectively. These plants increased our total processing capacity to 1.2approximately 1.5 Bcf/d in these areas. In our Natural Gas Liquids segment, we are the largest NGL takeaway providerWilliston Basin.
Production growth may be impacted by the current litigation challenging the validity of an easement for the Dakota Access Pipeline (DAPL), which is used to transport crude oil from the Williston Basin to markets in the STACKMid-Continent region and SCOOP areas, where NGL volumes significantlyGulf Coast. If DAPL operations are suspended, production growth could be limited due to increased crude oil transportation costs and pipeline capacity constraints in 2018, compared with 2017. To accommodate these volumes, we completed the expansion of our existing Sterling III pipeline and are constructing our Arbuckle II pipeline to support expected supply growth and transport NGLsregion, which could impact us due to the Gulf Coast market. We also announced plans to construct an extension of our Arbuckle II pipeline further north along with additional NGL gathering infrastructure, as well as an expansion of our Arbuckle II pipeline by 100 MBbl/d to a total capacity of 500 MBbl/d. In our Natural Gas Pipelines segment, we are connected to more than 30associated natural gas processing plants in Oklahoma. In the first quarter 2018, we completed the 100 MMcf/d expansion of our ONEOK Gas Transportation pipeline to provide increased westbound transportation services from the STACK area. An additional 100 MMcf/d westbound expansion from the STACK area to multiple interstate pipeline delivery points in western Oklahoma was also completed in 2018. In the first quarter 2019,and NGLs. However, we expect to complete an additional expansionlimited impact to our ONEOK Gas Transportationproducers due to alternative available crude pipeline with a 150 MMcf/d eastbound expansion from the STACKcapacity and SCOOP areas to an eastern Oklahoma interstate pipeline delivery point.
Permian Basin - We expect our Natural Gas Liquids and Natural Gas Pipelines business segments to benefit from increased production in the Permian Basin from the highly productive Delaware and Midland Basins. In our Natural Gas Liquids segment, we are well-positioned in the Permian Basin through our West Texas LPG pipeline system, which was recently extended into the core of the Delaware Basin through construction of a 120-mile pipeline lateral and a 40 MBbl/d expansion of the mainline. In September 2018, we announced a second expansion of our West Texas LPG pipeline system, which will increase the mainline capacityexisting rail infrastructure out of the Permian Basin by 80 MBbl/d as well as connect our West Texas LPG pipeline with our Arbuckle II pipeline, which is currently under construction. These projects are expected to position our West Texas LPG pipeline system for significant future NGL volume growth and are backed by long-term acreage and/or plant dedications. Rocky Mountain region.
In our Natural Gas Pipelines segment, our assets are connected to key supply areas and demand centers, including export markets in Mexico via our Roadrunner joint venture and supply areas in Canada and the United States via our WesTex pipeline are well-positioned to serve growth in the Permian Basin. The Roadrunner pipeline connects with our existing natural gas pipelineinterstate and storage infrastructure in Texas and, together with our completed WesTex intrastate natural gas pipeline expansion project, creates future opportunities forpipelines and our Northern Border Pipeline joint venture, which enables us to deliverprovide essential natural gas supplytransportation and storage services to Mexicoend users. Continued demand from local distribution companies, electric-generation facilities and transportlarge industrial companies resulted in low-cost expansions in 2019 and 2020 that position us well to provide additional expansions for our customers in 2021. Our natural gas transportation capacity contracted was not significantly impacted by market conditions and COVID-19 in 2020, as our end users rely on natural gas to other marketssupport their business regardless of commodity price fluctuations. We continued to experience stable fee-based earnings throughout 2020 with transportation capacity more than 95% contracted with firm commitments, and we expect these stable fee-based earnings to continue into 2021 at similarly contracted levels.
NGLs - In our Natural Gas Liquids segment, NGL volumes increased for the year ended December 31, 2020, compared with the same period in 2019, due primarily to increased volumes in the region.Rocky Mountain region, where we are the largest NGL takeaway provider. While we saw significant declines in volumes in the second quarter 2020, due to reduced demand as a result of COVID-19, by the third quarter 2020 average volumes exceeded pre-COVID-19 levels. NGL volumes were also favorably impacted by ethane production driven by improved ethane recovery economics due to increased demand from petrochemical manufacturers. We expect the improved NGL volumes to continue into 2021, and to benefit without significant capital investment, from our integrated assets, which were strengthened through our recently completed capital-growth projects. Our Elk Creek pipeline was completed in two phases during the expansionsecond half of 2019. In 2020, we completed an extension of our WesTex Transmission system by 300 MMcf/d fromBakken NGL pipeline, the Permian Basin to interstate pipeline delivery points in the Texas Panhandle. We also completed an expansion project onconstruction and extension of our Roadrunner joint venture to make the pipeline bidirectional, which will result in approximately 1.0 Bcf/d of eastbound transportation capacity from the Delaware Basin to the Waha area.
Gulf Coast - Demand for NGLs is expected to continue to increase at the Mont Belvieu, Texas, NGL market center as new world-scale ethylene production projects, petrochemical plant expansions and NGL export facilities continue to be completed. NGL supply growth and new NGL pipelines recently completed or being constructed, including our Elk Creek pipeline, Arbuckle II pipeline and West Texas LPG pipeline projects, are increasing NGL deliveries to Mont Belvieu, Texas. While we have significant NGL fractionation and storage assets in this area, additional capacity is needed to accommodate expected volume growth. To respond to this need, we are constructing two additionalthe construction of our 125 MBbl/d fractionators with related infrastructure in Mont Belvieu, Texas, MB-4 and MB-5, which are both fully contracted. Following the completion of MB-4 and MB-5, we expect our Gulf Coast NGL fractionation capacity to be approximately 600 MBbl/d and more than 1 million Bbl/d across our entire system. Our MB-5 project also includes system expansions that provide infrastructurefractionator.
capacity to support additional assets as we continue to evaluate opportunities for fractionation, storage and export facilities to meet the supply and demand for NGLs.
See Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in this Annual Report for more information on our growth projects, results of operations, liquidity and capital resources.
BUSINESS STRATEGY
Our primary business strategy is to maintain prudent financial strength and flexibility while growing our fee-based earnings and sustaining our dividends per share with a focus on safe, reliable, environmentally responsible, legally compliant and sustainablereliable operations for our customers, employees, contractors and the public through the following:
•Operate in a safe, reliable and environmentally responsible and sustainable manner - environmental, safety and health issues continuecontinues to be a primary focus for us, and our emphasis on personal and process safety has produced improvementsimproving trends in the key indicators we track. We also continue to look forseek ways to reduce our environmental impact by conserving resources and utilizing more efficient technologies;
technologies. We are preparing for the future energy transition and our role in meeting the world’s energy needs in an environmentally responsible way. In 2020, we were included in the Dow Jones Sustainability North America Index for the second consecutive year and added to the Dow Jones Sustainability World Index, which recognize companies for industry-leading environmental, social and governance performance;Maintain prudent financial strength and flexibility while growing our fee-based earnings, dividends per share and cash flows from operations in excess of dividends paid - we operate primarily fee-based businesses in each of our three reportable segments. We continue to invest in•Pursue organic growth projects to expandinvestments in our existing operating regions to support earnings growth - we expect earnings growth and provide a broad range of services to crude oildividend stability provided by significant earnings power and natural gas producers and end-use markets. In 2018, we paid dividends of $3.245 per share, an increase of 19 percent compared with the prior year. Our dividend increase and expected future dividend growth is due primarily toavailable operating capacity from our growth projects. We have spent approximately $2 billion of our announced $6 billion of capital-growth projects that are supported by a combination of long-term primarily fee-based contracts, minimum volume commitments and acreage dedications;recently
completed capital-growth projects. As producer activity warrants additional infrastructure, we have the option for low-cost expansions of existing infrastructure to accommodate increasing volumes;
•Manage our balance sheet and maintain investment-grade credit ratings - we seek to maintain investment-grade credit ratings. We expect to benefit from increasing cash flows from operations in 2019.ratings, pay down debt and internally fund capital-growth projects, when producer activity levels warrant additional infrastructure. At December 31, 2018,2020, we had $2.5 billion of borrowing capacity availableno borrowings outstanding under our $2.5 Billion Credit Agreement and $950$524.5 million of borrowings available under our $1.5 Billion Term Loan Agreement;cash and
cash equivalents; and•Attract, select, develop, motivate, challenge and retain a diverse group of employees to support strategy execution - we continue to execute on our recruiting strategy that targets professional and field personnel in our operating areas. We also continue to focus on employee development efforts with our current employees and monitor our benefits and compensation package to remain competitive.
NARRATIVE DESCRIPTION OF BUSINESS
We report operations in the following business segments:
•Natural Gas Gathering and Processing;
•Natural Gas Liquids; and
•Natural Gas Pipelines.
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 natural gas liquids pipelines to fractionation facilities for further processing.
Rocky Mountain region - The Williston Basin is located in portions of North Dakota and Montana and includes the oil-producing, NGL-rich Bakken Shale and Three Forks formations, and is an active drilling region.formations. Our completed capital-growth projects in the Williston Basin have increased our gathering and processing capacity to more than 1.0 Bcf/d and allowenable us to capture increased natural gas production from new wells and previously flared natural gas production.
The Powder River Basin is primarily located in Wyoming, which includes the NGL-rich Niobrara Shale and Frontier, Turner and Sussex formations where we provide gathering and processing services to customers in the eastern portion of Wyoming.
Mid-Continent region - The Mid-Continent region is an active drilling region and includes the oil-producing, NGL-rich STACK and SCOOP areas and the Cana-Woodford Shale, Woodford Shale, Springer Shale, Meramec, Granite Wash and Mississippian Lime formations of Oklahoma and Kansas;Kansas, and the Hugoton and Central Kansas Uplift Basins of Kansas.
Property - Our Natural Gas Gathering and Processing segment includes the following assets:
•18,900 miles of natural gas gathering pipelines;
•ten natural gas processing plants with 1.0 Bcf/d of processing capacity in the Mid-Continent region, and 12 natural gas processing plants with 1.5 Bcf/d of processing capacity in the Rocky Mountain region; and
•14 MBbl/d of NGL fractionation capacity at various natural gas processing plants.
In addition, we have access to up to 200 MMcf/d of processing capacity in the Mid-Continent region through a long-term processing services agreement with an unaffiliated third party.
Our paused and suspended growth projects are excluded from the assets listed above. See “Recent Developments” in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in this Annual Report for more information on our growth projects.
Sources of Earnings - Earnings for this segment are derived primarily from commodity sales and service contracts. For commodity sales, we contract to deliver residue natural gas, condensate and/or unfractionated NGLs to downstream customers at a specified delivery point. Our sales of NGLs are primarily to our affiliate in the Natural Gas Liquids segment. The following are our types of servicesservice contracts:
POP•Fee with feePOP contracts with no producer take-in-kind rights - We purchase raw natural gas and charge contractual fees for providing midstream services, which include gathering, treating, compressing and processing the producer’s natural gas. After performing these services, we sell the commodities and remit a portion of the commodity sales proceeds to the producer less our contractual fees. This type of contract represented 60 percent65% and 62 percent63% of supply volumes in this segment for 20182020 and 2017,2019, respectively. Upon adoption of Topic 606, the contractual fees we charge producers on these
•Fee with POP with fee contracts are recorded as a reduction to the commodity purchase price in cost of sales and fuel. In 2017 and prior periods, we recorded these fees as services revenue.
POP with fee contracts with producer take-in-kind rights - We purchase a portion of the raw natural gas stream, charge fees for providing the midstream services listed above, return primarily the residue natural gas to the producer, sell the remaining commodities and remit a portion of the commodity sales proceeds to the producer less our contractual fees. This type of contract represented 36 percent29% and 34 percent33% of supply volumes in this segment for 20182020 and 2017,2019, respectively.
•Fee-only - Under this type of contract, we charge a fee for the midstream services we provide, based on volumes gathered, processed, treated and/or compressed. Our fee-only contracts represented 4 percent6% and 4% of supply volumes in this segment in 20182020 and 2017.2019, respectively.
For commodity sales, we contract to deliver residue natural gas, condensate and/or unfractionated NGLs to downstream customers at a specified delivery point. Our sales of NGLs are primarily to our affiliate in the Natural Gas Gathering and Processing segment owns the following assets:Liquids segment.
11,500 miles and 7,700 miles of natural gas gathering pipelines in the Mid-Continent and Rocky Mountain regions, respectively;
ten natural gas processing plants with 1.0 Bcf/d of processing capacity in the Mid-Continent region, and 11 natural gas processing plants with 1.1 Bcf/d of processing capacity in the Rocky Mountain region; and
15 MBbl/d of natural gas liquids fractionation capacity at various natural gas processing plants in the Rocky Mountain region.
In addition, we have access to up to 200 MMcf/d of processing capacity in the Mid-Continent region through a long-term processing services agreement with an unaffiliated third party.
We are in the process of constructing our Demicks Lake I and Demicks Lake II natural gas processing plants. These projects will provide an additional 400 MMcf/d of processing capacity in the core of the Williston Basin.
Utilization - The utilization rates for our natural gas processing plants were 83 percent66% and 79 percent84% for 20182020 and 2017,2019, respectively. Our utilization rates decreased in 2020 due primarily to reduced demand as a result of COVID-19. We calculate utilization rates using a weighted-average approach, adjusting for the dates that assets were placed in service.
Unconsolidated Affiliates - Our Natural Gas Gathering and Processingunconsolidated affiliates in this segment includes the following unconsolidated affiliates:are not material.
49 percent ownership in Bighorn Gas Gathering, which gathers coal-bed methane produced in the Powder River Basin;
37 percent ownership in Fort Union Gas Gathering, which gathers coal-bed methane produced in the Powder River Basin and delivers it to the interstate pipeline system;
35 percent ownership interest in Lost Creek Gathering Company, which gathers natural gas produced from conventional dry natural gas wells in the Wind River Basin of central Wyoming and delivers it to the interstate pipeline system; and
10 percent ownership interest in Venice Energy Services Co., a natural gas processing facility near Venice, Louisiana.
See Note M of the Notes to Consolidated Financial Statements in this Annual Report for additional discussion of our unconsolidated affiliates.
Government Regulation-The FERC traditionally has maintained that a natural gas processing plant is not a facility for the transportation or sale of natural gas in interstate commerce and, therefore, is not subject to jurisdiction under the Natural Gas Act. Although the FERC has made no specific declaration as to the jurisdictional status of our natural gas processing operations or facilities, our natural gas processing plants are primarily involved in extracting NGLs and, therefore, are exempt
from FERC jurisdiction. The Natural Gas Act also exempts natural gas gathering facilities from the jurisdiction of the FERC. We believe our natural gas gathering facilities and operations meet the criteria used by the FERC for nonjurisdictional natural gas gathering facility status. Interstate transmission facilities remain subject to FERC jurisdiction. The FERC has historically distinguished between these two types of facilities, either interstate or intrastate, on a fact-specific basis. We transport residue natural gas from certain of our natural gas processing plants to interstate pipelines in accordance with Section 311(a) of the Natural Gas Policy Act. Oklahoma, Kansas, Wyoming, Montana and North Dakota also have statutes regulating, to varying degrees, the gathering of natural gas in those states. In each state, regulation is applied on a case-by-case basis if a complaint is filed against the gatherer with the appropriate state regulatory agency.
See further discussion in the “Regulatory, Environmental and Safety Matters” section.
Natural Gas Liquids
Overview - Our Natural Gas Liquids segment owns and operates facilities that gather, fractionate, treat and distribute NGLs and store NGL products, primarily in Oklahoma, Kansas, Texas, New Mexico and the Rocky Mountain region, which includes the Williston, Powder River and DJ Basins, where weBasins. We provide midstream services to producers of NGLs and deliver those products to the two primary market centers,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 natural gas liquidsNGL 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. We have a 50% ownership interest in Overland Pass Pipeline Company, which operates an interstate NGL pipeline originating in Wyoming and Colorado and terminating in Kansas. The majority of the pipeline-connected natural gas processing plants in the Williston Basin, Oklahoma, Kansas and the Texas Panhandle are connected to our NGL gathering systems. We lease rail cars and own and operate truck- and rail-loading and -unloading facilities connected to our NGL fractionation, storage and pipeline assets. We also own FERC-regulated natural gas liquidsNGL distribution pipelines in Kansas, Missouri, Nebraska, Iowa, Illinois and Indiana that connect our Mid-Continent assets with Midwest markets, including Chicago, Illinois. A portion of our ONEOK North System transports refined petroleum products, including unleaded gasoline and diesel, from Kansas to Iowa. The majority
Property - Our Natural Gas Liquids segment includes the following assets:
•9,130 miles of gathering pipelines with operating capacity of 1,760 MBbl/d, including 6,330 miles of FERC-regulated pipelines with operating capacity of 1,460 MBbl/d;
•4,350 miles of distribution pipelines with operating capacity of 1,150 MBbl/d, including 4,180 miles of FERC-regulated pipelines with operating capacity of 1,080 MBbl/d;
•eight NGL fractionators with combined operating capacity of 920 MBbl/d (includes interests in our proportional share of operating capacity), including 520 MBbl/d in the pipeline-connected natural gas processing plantsMid-Continent region and 400 MBbl/d in Oklahoma,the Gulf Coast region;
•one isomerization unit with operating capacity of 10 MBbl/d;
•one ethane/propane splitter with operating capacity of 40 MBbl/d;
•six NGL storage facilities with operating storage capacity of 30 MMBbl; and
•eight NGL product terminals.
In addition, we lease 10 MMBbl of annual pipeline capacity near our ONEOK North System and have access to 5 MMBbl of combined NGL storage capacity at facilities in Kansas and the Texas Panhandle are connected to our natural gas liquids gathering systems. We own and operate truck- and rail-loading and -unloading facilities connected to our natural gas liquids fractionation and pipeline assets.
Most natural gas produced at the wellhead contains a mixture60 MBbl/d of NGL components, such as ethane, propane, iso-butane, normal butanefractionation capacity in the Gulf Coast through service agreements.
Our paused and natural gasoline. The NGLs thatsuspended growth projects are separatedexcluded from the natural gas stream at natural gas processing plants remainassets listed above. See “Recent Developments” in a mixed, unfractionated form until they are gathered, primarily by pipeline,Part II, Item 7, Management’s Discussion and delivered to fractionators where the NGLs are separated into NGL products. These NGL products are then stored or distributed toAnalysis of Financial Condition and Results of Operations, in this Annual Report for more information on our customers, such as petrochemical manufacturers, heating fuel users, ethanol producers, refineries, exporters and propane distributors.growth projects.
Sources of Earnings - Earnings for our Natural Gas Liquids segment are derived primarily from commodity sales and purchases and fee-based services. We also purchase NGLs and condensate from third parties, as well as from our Natural Gas Gathering and Processing segment. Our business activities are categorized as exchange services, transportation and storage services, and optimization and marketing, which are defined as follows:
•Exchange services - We utilize our assets to gather, transport, treat and fractionate unfractionated NGLs, thereby converting them into marketable NGL products delivered to a market center or customer-designated location. Many of these exchange volumes are under contracts with minimum volume commitments that provide a minimum level of revenues regardless of volumetric throughput. Our exchange services activities are primarily fee-based and include
some rate-regulated tariffs; however, we also capture certain product price differentials through the fractionation process.
•Transportation and storage services - We transport NGL products and refined petroleum products, primarily under FERC-regulated tariffs. Tariffs specify the maximum rates we may charge our customers and the general terms and conditions for transportation service on our pipelines. Our storage activities consist primarily of fee-based NGL storage services at our Mid-Continent and Gulf Coast storage facilities.
•Optimization and marketing - We utilize our assets, contract portfolio and market knowledge to capture location, product and seasonal price differentials through the purchase and sale of NGLs and NGL products. We primarily transport NGL products between Conway, Kansas, and Mont Belvieu, Texas, to capture the location price differentials between the two market centers. Our marketing activities also include utilizing our natural gas liquidsNGL storage facilities to capture seasonal price differentials. A growing portion of our marketing activities servesdifferentials and serving truck and rail markets. Our isomerization activities capture the price differential when normal butane is converted into the more valuable iso-butane at our isomerization unit in Conway, Kansas.
In many of our exchange services contracts, we purchase the unfractionated NGLs at the tailgate of the processing plant and deduct contractual fees related to the transportation and fractionation services we must perform before we can sell them as NGL products. Upon adoption of Topic 606,To the contractual fees we charge are now recorded as a reduction to the commodity purchase price in cost of sales and fuel. In 2017 and prior periods, we recorded these fees as exchange services revenue. To the
extent we hold unfractionated NGLs in inventory, the related contractual fees previously recorded in services revenue when NGLs were received on our system will not be recognized until the unfractionated inventory is fractionated and sold.
PropertyUtilization -Our Natural Gas Liquids segment owns the following assets:
|
| | | | | |
Region/Asset | Miles of Pipeline | | Capacity |
Gathering Pipelines (a) | | | (MBbl/d)
|
Rocky Mountain Region | 846 |
| | 135 |
|
Mid-Continent Region | 3,760 |
| | 1,161 |
|
West Texas LPG System | 2,849 |
| | 285 |
|
Total | 7,455 |
| | 1,581 |
|
| | | |
Distribution Pipelines (b) | | | |
Sterling Pipelines | 1,804 |
| | 458 |
|
ONEOK North System | 1,704 |
| | 213 |
|
Other | 949 |
| | 595 |
|
Total | 4,457 |
| | 1,266 |
|
(a) - Includes 4,545 miles of FERC-regulated pipelines with peak capacity of 683 MBbl/d.
(b) - Includes 4,290 miles of FERC-regulated pipelines with peak capacity of 1,200 MBbl/d.
|
| | | | | |
Region/Asset | Number of Facilities | | Capacity |
Facilities | | | (MBbl/d) |
Gulf Coast Region Fractionators (a) | 3 |
| | 278 |
|
Mid-Continent Region Fractionators (a) | 4 |
| | 521 |
|
Isomerization Unit | 1 |
| | 9 |
|
Ethane/Propane Splitter | 1 |
| | 40 |
|
Total | 9 |
| | 848 |
|
| | | |
Storage and Terminals | | | (MMBbl) |
NGL Storage | 6 |
| | 22.2 |
|
ONEOK North System Terminals | 8 |
| | 1.0 |
|
Total | 14 |
| | 23.2 |
|
(a) - Includes interest in our proportional share of operating capacity.
In addition, we lease 3.8 MMBbl of combined NGL storage capacity at facilities in Kansas and Texas and have access to 60 MBbl/d of natural gas liquids fractionation capacity in the Gulf Coast through a fractionation service agreement.
We are in the process of constructing the following assets:
|
| | | | | |
Region/Asset | Miles of Pipeline | | Capacity |
Gathering Pipelines | | | (MBbl/d) |
Rocky Mountain Region | 900 |
| | 240 |
|
Mid-Continent Region | 530 |
| | 500 |
|
West Texas LPG System | — |
| | 80 |
|
Total | 1,430 |
| | 820 |
|
| | | |
Facilities | | | |
Gulf Coast Region Fractionators (two locations) | | | 250 |
|
Utilization -The utilization rates for our various assets, including leased assets, have been impacteddecreased in 2020, due primarily to reduced demand as a result of COVID-19, which was partially offset by ethane rejection.economics, including the impact of ethane rejection in 2019 and ethane recovery in 2020. The utilization rates for 20182020 and 2017,2019, respectively, were as follows:
•our natural gas liquidsNGL gathering pipelines were 78 percent61% and 75 percent;78%;
•our natural gas liquidsNGL distribution pipelines were 59 percent51% and 57 percent;63%; and
•our natural gas liquidsNGL fractionators were 85 percent77% and 74 percent.84%.
We calculate utilization rates using a weighted-average approach, adjusting for the dates that assets were placed in service. Our fractionation utilization rate reflects approximate proportional capacity associated with our ownership interests.
Unconsolidated Affiliates - Our Natural Gas Liquids segment includes the following unconsolidated affiliates:
50 percentWe have a 50% ownership interest in Overland Pass Pipeline Company, which operates an interstate natural gas liquidsNGL pipeline system extending 760 miles, originating in Wyoming and Colorado and terminating in Kansas;Kansas. Our other unconsolidated affiliates in this segment are not material.
50 percent ownership interest in Chisholm Pipeline Company, which operates an interstate natural gas liquids pipeline system extending 185 miles from origin points in Oklahoma and terminating in Kansas; and
50 percent ownership interest in Heartland Pipeline Company, which operates a terminal and pipeline system that transports refined petroleum products in Kansas, Nebraska and Iowa.
See Note M of the Notes to Consolidated Financial Statements in this Annual Report for additional discussion of unconsolidated affiliates.
Government Regulation - The operations and revenues of our natural gas liquidsNGL pipelines are regulated by various state and federal government agencies. Our interstate natural gas liquidsNGL pipelines are regulated byunder the Interstate Commerce Act, which gives the FERC which has authority overjurisdiction to regulate the terms and conditions of service;service, rates, including depreciation and amortization policies;policies, and initiation of service. In Oklahoma, Kansas and Texas, certain aspects of our intrastate natural gas liquidsNGL pipelines that provide common carrier service are subject to the jurisdiction of the OCC, KCC and RRC, respectively.
See further discussion in the “Regulatory, Environmental and Safety Matters” section.
Natural Gas Pipelines
Overview - Our Natural Gas Pipelines segment, through its wholly owned assets, provides transportation and storage services to end users through its wholly owned assets and its 50 percentusers. We have 50% ownership interests in Northern Border Pipeline and Roadrunner.Roadrunner, which provide transportation services to various end users.
Interstate Pipelines - Our interstate pipelines are regulated by the FERC and are located in North Dakota, Minnesota, Wisconsin, Illinois, Indiana, Kentucky, Tennessee, Oklahoma, Texas and New Mexico. Our interstate pipeline companies include:
•Midwestern Gas Transmission, which is a bidirectional system that interconnects with Tennessee Gas Transmission Company’s pipeline near Portland, Tennessee, and with several interstate pipelines that have access to both the Utica Shale and the Marcellus Shale at the Chicago Hub near Joliet, Illinois;
•Viking Gas Transmission, which is a bidirectional system that interconnects with a TransCanada Corporation pipeline at the United States border near Emerson, Canada, and ANR Pipeline Company near Marshfield, Wisconsin;
•Guardian Pipeline, which interconnects with several pipelines at the Chicago Hub near Joliet, Illinois, and with local natural gas distribution companies in Wisconsin; and
•OkTex Pipeline, which has interconnections with several pipelines in Oklahoma, Texas and New Mexico.
Intrastate Pipelines - Our intrastate natural gas pipeline assets in Oklahoma transport natural gas throughthroughout the state and have access to the major natural gas production areas in the Mid-Continent region, which include the STACK and SCOOP areas and the Cana-Woodford Shale, Woodford Shale, Springer Shale, Meramec, Granite Wash and Mississippian Lime formations. In Texas, our intrastate natural gas pipelines are connected to the major natural gas producing formations in the Texas Panhandle, including the Granite Wash formation and Delaware and Midland Basins in the Permian Basin. These pipelines are capable of transporting natural gas throughout the western portion of Texas, including the Waha area where other pipelines may be accessed for transportation to western markets, exports to Mexico, the Houston Ship Channel market to the east and the Mid-Continent market to the north. Our intrastate natural gas pipeline assets also have access to the Hugoton and Central Kansas Uplift Basins in Kansas.
Property - Our Natural Gas Pipelines segment includes the following assets:
•1,500 miles of FERC-regulated interstate natural gas pipelines with 3.5 Bcf/d of peak transportation capacity;
•5,100 miles of state-regulated intrastate transmission pipelines with peak transportation capacity of 4.3 Bcf/d; and
•six underground natural gas storage facilities with 52.2 Bcf of total active working natural gas storage capacity.
Our storage includes two underground natural gas storage facilities in Oklahoma, two underground natural gas storage facilities in Kansas and two underground natural gas storage facilities in Texas.
Sources of Earnings - Earnings in this segment are derived primarily from transportation and storage services.
Our transportation earnings are primarily fee-based from the following types of services:
•Firm service - Customers reserve a fixed quantity of pipeline capacity for a specified period of time, which obligates the customer to pay regardless of usage. Under this type of contract, the customer pays a monthly fixed fee and
incremental fees, known as commodity charges, which are based on the actual volumes of natural gas they transport or store. Under the firm service contract, the customer generally is guaranteed access to the capacity they reserve.
•Interruptible service - Under interruptible service transportation agreements, the customer may utilize available capacity after firm service requests are satisfied. The customer is not guaranteed use of our pipelines unless excess capacity is available.
Our regulated natural gas transportation services contracts are based upon rates stated in the respective tariffs, which have generally been established through shipper specific negotiation, discounts and negotiated settlements. The rates are filed with FERC or the appropriate state jurisdictional agencies. In addition, customers typically are assessed fees, such as a commodity charge, and we may retain a percentage or specified volume of natural gas in-kind based on the natural gas volumes transported.
Our storage earnings are primarily fee-based from the following types of services:
•Firm service - Customers reserve a specific quantity of storage capacity, including injection and withdrawal rights, and generally pay fixed fees based on the quantity of capacity reserved plus an injection and withdrawal fee. Firm storage contracts typically have terms longer than one year.
•Park-and-loan service - An interruptible storage service offered to customers providing the ability to park (inject) or loan (withdraw) natural gas into or out of our storage, typically for monthly or seasonal terms. Customers reserve the right to park or loan natural gas based on a specified quantity, including injection and withdrawal rights when capacity is available.
Upon adoption of Topic 606, we record retained fuel charges as a reduction to cost of sales and fuel that would have been recorded as transportation or storage revenue prior to adoption.
We own natural gas storage facilities located in Texas and Oklahoma that are connected to our intrastate natural gas pipelines. We also have underground natural gas storage facilities in Kansas.
Property - Our Natural Gas Pipelines segment owns the following assets:
1,500 miles of FERC-regulated interstate natural gas pipelines with 3.5 Bcf/d of peak transportation capacity;
5,200 miles of state-regulated intrastate transmission pipelines with peak transportation capacity of 4.1 Bcf/d; and
52.2 Bcf of total active working natural gas storage capacity.
Our storage includes two underground natural gas storage facilities in Oklahoma, two underground natural gas storage facilities in Kansas and two underground natural gas storage facilities in Texas.
Utilization - Our natural gas pipelines were 9696% and 94 percent98% subscribed in 20182020 and 2017,2019, respectively, and our natural gas storage facilities were 64 percent71% and 64% subscribed in both 20182020 and 2017,2019, respectively.
Unconsolidated Affiliates - Our Natural Gas Pipelines segment includes the following unconsolidated affiliates:
50 percent•50% ownership interest in Northern Border Pipeline, which owns a FERC-regulated interstate pipeline that transports natural gas from the Montana-Saskatchewan border near Port of Morgan, Montana, and the Williston Basin in North Dakota to a terminus near North Hayden, Indiana.
50 percent•50% ownership interest in Roadrunner, a bidirectional pipeline, which has the capacity to transport 570 MMcf/d of natural gas from the Permian Basin in West Texas to the Mexican border near El Paso, Texas, and will havehas capacity to transport approximately 1.0 Bcf/d of natural gas from the Delaware Basin to the Waha area. We are the operator of Roadrunner.
See Note M of the Notes to Consolidated Financial Statements in this Annual Report for additional discussion of unconsolidated affiliates.
Government Regulation - Interstate - Our interstate natural gas pipelines are regulated under the Natural Gas Act, which gives the FERC jurisdiction to regulate virtually all aspects of this business, such as transportation of natural gas, rates and charges for services, construction of new facilities, depreciation and amortization policies, acquisition and disposition of facilities, and the initiation and discontinuation of services.
Intrastate - Our intrastate natural gas pipelines in Oklahoma, Kansas and Texas are regulated by the OCC, KCC and RRC, respectively, and by the FERC under the Natural Gas Policy Act for certain services where we deliver natural gas into FERC
regulated natural gas pipelines. While we have flexibility in establishing natural gas transportation rates with customers, there is a maximum rate that we can charge our customers in Oklahoma and Kansas and for the services regulated by the FERC. In Texas and Kansas, natural gas storage may be regulated by the state and by the FERC for certain types of services. In Oklahoma, natural gas storage operations are not subject to rate regulation by the state, and we have market-based rate authority from the FERC for certain types of services.
See further discussion in the “Regulatory, Environmental and Safety Matters” section.
Market Conditions and Seasonality
Supply and Demand-Supply for each of our segments depends on crude oil and natural gas drilling and production activities, which are driven by the strength of the economy; the decline rate of existing production; producer access to capital; producer firm commitments to transportation pipelines; natural gas, crude oil and NGL prices; or the demand for each of these products from end users.
Demand for gathering and processing services is dependent on natural gas production by producers in the regions in which we operate. State requirements in North Dakota for producers to reduce natural gas flaring have increased the need for our services to capture, gather and process natural gas, and we are responding by constructing assets, such as our announced Demicks Lake I and Demicks Lake II natural gas processing plants.gas. Demand for NGLs and the ability of natural gas processors to successfully and
economically sustain their operations affect the volume of unfractionated NGLs produced by natural gas processing plants, thereby affecting the demand for NGL gathering, transportation and fractionation services. Natural gas and NGL products are affected by economic conditions and the demand associated with the various industries that utilize the commodities, such as butanes and natural gasoline used by the refining industry as blending stocks for motor fuel, denaturant for ethanol and diluents for crude oil. Ethane, propane, normal butane and natural gasoline are also used by the petrochemical industry to produce chemical components, used for a range of products such as plastic, rubberthat improve our daily lives and synthetic fibers.promote economic growth, including health care products, recyclable food packaging, clothing, technology, building materials, industrial, manufacturing and energy infrastructure, lightweight vehicle components and batteries. Propane is also used to heat homes and businesses. Demand for NGLs continues to increase
See additional discussion regarding the impacts of COVID-19 on supply and demand under “Business Update, Market Conditions and COVID-19” in our Executive Summary at the Mont Belvieu, Texas, NGL market center as new world-scale ethylene production projects, petrochemical plant expansionsbeginning of this Item 1. Business.
Commodity Prices - In March 2020, the increase in crude oil supply combined with a decrease in crude oil demand stemming from the global response and NGL export facilities continueuncertainties related to be completed. End-users of residue natural gas include large commercial and industrial customers, natural gas and electric utilities serving individual consumers and similar international markets through liquefied natural gas (LNG) exports.
Commodity Prices -COVID-19 resulted in a sharp decline in crude oil prices. However, in the third quarter 2020, prices significantly improved from second quarter lows. Our earnings are primarily fee-based in all three of our segments. Insegments, however in our Natural Gas Gathering and Processing segment, we are exposed to limited commodity price risk as a result of retaining a portion of the commodity sales proceeds associated with our fee with POP contracts. Under certain fee with fee contracts.POP contracts, our contractual fees and POP percentage may increase or decrease if production volumes, delivery pressures or commodity prices change relative to specified thresholds. In our Natural Gas Liquids segment, we are exposed to marketcommodity price risk associated with changes in the price of NGLs; the location differential between the Mid-Continent, Chicago, Illinois, and Gulf Coast regions; and the relative price differential between natural gas, NGLs and individual NGL products, which affect our NGL purchases and sales, and our exchange services, transportation and storage services, and optimization and marketing financial results. NGL storage revenue may be affected by price volatility and forward pricing of NGL physical contracts versus the price of NGLs on the spot market. In our Natural Gas Pipelines segment, we are exposed to marketminimal commodity price risk associated with (i) changes in the price of natural gas, which impact our fuel costs and retained fuel in-kind received for our services; (ii) interruptible contracts or when existing firm contracts expire and are subject to renegotiation with customers that have competitive alternatives, which affect our transportation revenues; and (iii)(ii) the differential between forward pricing of natural gas physical contracts and the price of natural gas on the spot market, which affectsmay affect our customer demand for our natural gas storage revenue.services.
See additional discussion regarding our commodity price risk and related hedging activities under “Commodity Price Risk” in Part II, Item 7A, Quantitative and Qualitative Disclosures about Market Risk.Risk, in this Annual Report.
Seasonality - Cold temperatures usually increase demand for natural gas and certain NGL products, such as propane, the main heating fuels for homes and businesses. Warm temperatures usually increase demand for natural gas used in gas-fired electric generatorsgeneration for residential and commercial cooling, as well as agriculture-related equipment like irrigation pumps and crop dryers. Demand for butanes and natural gasoline, which are primarily used by the refining industry as blending stocks for motor fuel, denaturant for ethanol and diluents for crude oil, are also subject to some variability during seasonal periods when certain government restrictions on motor fuel blending products change. During periods of peak demand for a certain commodity, prices for that product typically increase.
Extreme weather conditions, seasonal temperature changes and the impact of temperature and humidity on the mechanical abilities of the processing equipment impact the volumes of natural gas gathered and processed and NGL volumes gathered, transported and fractionated. Power interruptions and inaccessible well sites as a result of severe storms or freeze-offs, a phenomenon where water produced from natural gas freezes at the wellhead or within the gathering system, may cause a temporary interruption in the flow of natural gas and NGLs.
In our Natural Gas Pipelines segment, natural gas storage is necessary to balance the relatively steady natural gas supply with the seasonal demand of residential, commercial and electric-generation users.
Competition- We compete for natural gas and NGL supplywith other midstream companies, and major integrated oil companies and independent exploration and production companies that have gathering and processing assets, fractionators, intrastate and interstate pipelines and storage facilities. The factors that typically affect our ability to compete for natural gas and NGL supply are:
•quality of services provided;
•producer drilling activity;
•proceeds remitted and/or fees charged under our contracts;
•proximity of our assets to natural gas and NGL supply areas and markets;
•proximity of our assets to alternative energy production;
•location of our assets relative to those of our competitors;
•efficiency and reliability of our operations;
•receipt and delivery capabilities for natural gas and NGLs that exist in each pipeline system, plant, fractionator and storage location;
•the petrochemical industry’s level of capacity utilization and feedstock requirements;
•current and forward natural gas and NGL prices; and
•cost of and access to capital.
We have responded by making capital investments to access and connect new supplies with end-user demand; increasing gathering, processing, fractionation and pipeline capacity; increasing storage, withdrawal and injection capabilities; and reducing operating costs so that we compete effectively. Our competitors also continue to invest in midstream infrastructure to address the growing natural gas and NGL supply and market demand. Our and our competitors’ infrastructure projects provide midstream services across our operating regions, which may affect commodity prices and compete with and could displace supply volumes from the Mid-Continent and Rocky Mountain regions and the Permian Basin where our assets are located. We believe our assets are located strategically, connecting diverse supply areas to market centers.
Customers - Our Natural Gas Gathering and Processing and Natural Gas Liquids segments derive services revenue from major and independent crude oil and natural gas producers. Our Natural Gas Liquids segment’s customers also include NGL and natural gas gathering and processing companies. Our downstream commodity sales customers are primarily petrochemical, refining and marketing companies, utilities, large industrial companies, natural gasoline distributors, propane distributors municipalities and petrochemical, refining and marketing companies.municipalities. Our Natural Gas Pipeline segment’s assets primarily serve local natural gas distribution companies, electric-generation facilities, large industrial companies, municipalities, producers, processors and marketing companies. Our utility customers generally require our services regardless of commodity prices. See discussion regarding our customer credit risk under “Counterparty Credit Risk” in Part II, Item 7A, Quantitative and Qualitative Disclosures about Market Risk.Risk, in this Annual Report.
Other
Through ONEOK Leasing Company, L.L.C. and ONEOK Parking Company, L.L.C., we own a 17-story office building (ONEOK Plaza) with 505,000 square feet of net rentable space and a parking garage in downtown Tulsa, Oklahoma, where our headquarters are located. ONEOK Leasing Company, L.L.C. leases excess office space to others and operates our headquarters office building. ONEOK Parking Company, L.L.C. owns and operates a parking garage adjacent to our headquarters.
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.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 materiallyadversely our results of operations and cash flows. In addition, emissions controls and/or other regulatory or permitting mandates under the Clean Air Act and other similar federal and state laws could require unexpected capital expenditures at our facilities. We cannot assure that existing environmental statutes and regulations will not be revised or that new regulations will not be adopted or become applicable to us. We also cannot assure that existing permits will not be revised or cancelled, potentially impacting facility construction activities or ongoing operations.
Some scientists have determined that GHG emissions endanger public health and the environment because emissions of such gases may contribute to warming of the earth’s atmosphere and other climatic changes. GHG emissions originate primarily from combustion engine exhaust, heater exhaust and fugitive methane gas emissions. International, federal, regional and/or state legislative and/or regulatory initiatives may attempt to control or limit GHG emissions, including initiatives directed at issues associated with climate change. Various federal and state legislative proposals have been introduced to regulate the emission of GHGs, particularly carbon dioxide and methane, and the United States Supreme Court has ruled that carbon dioxide is a pollutant subject to regulation by the EPA. In addition, there have been international efforts seeking legally binding reductions in emissions of GHGs.
Our environmentalGHG emissions originate primarily from combustion engine exhaust, heater exhaust and climate changefugitive methane gas emissions. Our environmental actions focus on minimizing the impact of our operations on the environment. These actions include: (i) developing and maintaining an accurate GHG emissions inventory according to current rules issued by the EPA; (ii) improving the efficiency of our various pipelines, natural gas processing facilities and natural gas liquidsNGL fractionation facilities;
(iii) following developing technologies for emissions control and the capture of carbon dioxide to keep it from reaching the atmosphere; and (iv) utilizing practices to reduce the loss of methane from our facilities. In addition, many of our compressor station facilities are designed and operated with electric-driven compression units, which greatly reduce the potential emission from these facilities, including Scope 1 GHG emissions.emissions, which are emissions directly sourced from our facilities.
We participate in the EPA’s Natural Gas STAR Program and the Our Nation’s Energy (ONE) Future Coalition to reduce voluntarily methane emissions. We continue to focus on maintaining low methane gas release rates through expanded implementation of best practices to limit the release of natural gas during pipeline and facility maintenance and operations.
We believe it is likely that future governmental legislation and/or regulation may require us either to limit GHG emissions from our operations, or to purchase allowances for such emissions.emissions or to be subject to a carbon emissions tax. However, we cannot predict precisely what form these future regulations will take, the stringency of the regulations, or when they will become effective.effective or the impact on our results of operations. In addition to activities on the federal level, state and regional initiatives could also lead to the regulation of GHG emissions sooner than and/or independent of federal regulation. These regulations could be more stringent than any federal legislation that may be adopted.
For additional information regarding the potential impact of laws and regulations on our operations see Item 1A “Risk Factors.”
Pipeline Safety - We are subject to PHMSA safety regulations, including pipeline asset integrity-management regulations. The Pipeline Safety Improvement Act of 2002 requires pipeline companies operating high-pressure pipelines to perform integrity assessments on pipeline segments that pass through densely populated areas or near specifically designated high-consequence areas. The Pipeline Safety, Regulatory Certainty and Job Creation Act of 2011 (the 2011 Pipeline Safety Act) increased maximum penalties for violating federal pipeline safety regulations, directs the DOT and Secretary of Transportation to conduct further review or studies on issues that may or may not be material to us and may result in the imposition of more stringent regulations.
SinceIn 2015, PHMSA has issued notices of proposed rule-makingrulemaking for hazardous liquid pipeline safety regulations, natural gas transmission and gathering lines and underground natural gas storage facilities, noneknown as “the Mega Rule.” Due to the large number of which have become final.rules being considered, PHMSA partitioned the new rulemaking into three sections. To date, the first section of rules was finalized and published in 2019 in the federal register. These final rules mostly address congressional mandates due to former pipeline safety reauthorizations. We do not anticipate the potential capital and operating expenditures related to the first section of rules to create a material impact to our planned capital or operations and maintenance costs. At this point, we do not fully know the impact of the regulations that remain to be finalized. Coupled together, these new rules may provide increased requirements for operating and maintenance, integrity management, public awareness and civil/criminal penalties; however, we do not anticipate a material impact to our planned capital or operations and maintenance costs resulting from compliance with the new or pending regulations. In 2020, legislation was passed to reauthorize PHMSA through 2024. Certain requirements for operations and maintenance, integrity management, leak detection and public awareness will be subject to new rulemaking as a result. The potential capital and operating expenditures related to the proposednew regulations are unknown,not fully known, but we do not anticipate a material impact to our planned capital or operations and maintenance costs resulting from compliance with the current or pendingnew regulations.
Air and Water Emissions - The Clean Air Act, the Clean Water Act, analogous state laws and/or regulations impose restrictions and controls regarding the discharge of pollutants into the air and water in the United States. Under the Clean Air Act, a federally enforceable operating permit is required for sources of significant air emissions. We may be required to incur certain capital expenditures for air pollution-control equipment in connection with obtaining or maintaining permits and approvals for sources of air emissions. The Clean Water Act imposes substantial potential liability for the removal of pollutants discharged to waters of the United States and remediation of waters affected by such discharge.
International, federal, regional and/or state legislative and/or regulatory initiatives may attempt to control or limit GHG emissions, including initiatives directed at issues associated with climate change. We monitor all relevant legislation and regulatory initiatives to assess the potential impact on our operations and otherwise take efforts to limit GHG emissions from our facilities, including methane. The EPA’s Mandatory Greenhouse Gas Reporting Rule requires annual GHG emissions reporting from affected facilities and the carbon dioxide emission equivalents for the natural gas delivered by us and the emission equivalents for all NGLs produced by us as if all of these products were combusted, even if they are used otherwise.
Our 20172019 total emissions reported pursuant to EPA requirements were approximately 5060 million metric tons of carbon dioxide equivalents. This total includes direct emissions from the combustion of fuel in our equipment, such as compressor engines and heaters, as well as carbon dioxide equivalents from natural gas and NGL products delivered to customers and produced as if all such fuel and NGL products were combusted. The additional cost to gather and report this emission data did not have, and we
do not expect it to have, a material impact on our results of operations, financial position or cash flows. In addition, Congress has considered, and may consider in the future, legislation to reduce GHG emissions, including carbon dioxide and methane. Likewise, the EPA may institute additional regulatory rule-makingrulemaking associated with GHG emissions from the oil and natural gas industry. At this time, no rule or legislation has been enacted that assesses any material costs, fees or expenses on any of these emissions.
We closely monitor proposed and final rule-makings.rulemakings. At this time, we do not anticipate a material impact to our planned capital, operations and maintenance costs resulting from compliance with the current or pending regulations and EPA actions. However, the EPA may issue additional regulations, responses, amendments and/or policy guidance, which could alter our present expectations. Generally, EPA rule-makingsrulemakings require expenditures for updated emissions controls, monitoring and record-keeping requirements at affected facilities.
Chemical Site Security - The United States Department of Homeland Security (Homeland Security) released the Chemical Facility Anti-Terrorism Standards in 2007, and the new final rule associated with these regulations was issued in December 2014. We provided information regarding our chemicals via Top-Screens submitted to Homeland Security, and our facilities subsequently were assigned one of four risk-based tiers ranging from high (Tier 1) to low (Tier 4) risk, or not tiered at all due to low risk. To date, one of our facilities has been given a Tier 4 rating. Facilities receiving a Tier 4 rating are required to complete Site Security Plans, andincluding possible physical security enhancements. We do not expectThe cost of the Site Security Plans and possible security enhancement costs toenhancements did not have a material impact on our results of operations, financial position or cash flows.
Pipeline Security - The United States Department of Homeland Security’s Transportation Security Administration and the DOT have completed a review and inspection of our “critical facilities” and identified no material security issues. Also, the Transportation Security Administration has released new pipeline security guidelines that include broader definitions for the determination of pipeline “critical facilities.” We have reviewed our pipeline facilities according to the new guideline requirements, and there have been no material changes required to date.
EMPLOYEESHUMAN CAPITAL
AtThe long-term sustainability of our business is dependent on our continued ability to attract, select, develop, motivate, challenge and retain a diverse group of employees to execute our business strategies. We manage our human capital by offering compensation and benefits that are designed to position us as an employer of choice. We also invest significant time and resources developing our employees, training them on health, safety and compliance matters and building inclusive, high-performing teams.
As of December 31, 2020, we had 2,886 employees. Listed below is a summary of our human capital resources, measures and objectives that are collectively important to our success as an organization.
Culture - Our success is due in large part to the skills, experience and dedication of our employees. We are committed to cultivating an inclusive and dynamic work environment where talented people can find opportunities to succeed, grow and contribute to the success of the company. Our employees work each day to provide safe and reliable services to a wide range of customers in the states where we operate. Our core values - Ethics, Quality, Diversity, Value and Service - guide the way in which our employees conduct our business and operations. Our core value of Ethics means our actions are founded on trust, honesty and integrity through open communications and adherence to the highest standards of personal, professional and business ethics. Our core value of Quality drives us to make continuous improvements in our quest for excellence. Our core value of Diversity means we value the diversity, dignity and worth of each employee, and believe that a diverse and inclusive workforce is critical to our continued success. Our core value of Value means we are committed to creating value for all stakeholders - employees, customers, investors and our communities - through the optimum development and utilization of our resources. Finally, our core value of Service means we provide responsive, flexible service to customers, and commit to preserving the environment, providing a safe work environment and improving the quality of life for employees where they live and work.
Diversity and Inclusion - Our diversity and inclusion (D&I) strategy is a cross-functional effort that draws upon contributions from employees at all levels of the organization and is focused on enhancing the workplace to retain and attract talent. The strategy is guided by a D&I Council composed of a diverse group of employees who represent different demographics, work locations, points of view, roles and levels of seniority. Our Chief Executive Officer serves as chair of the D&I Council and attends all meetings of the D&I Council, along with the rest of our senior leadership team. We also have a team within our organizational development group that is wholly dedicated to supporting our D&I efforts.
In 2020, we provided funding and support for five employee-led business resource groups (BRGs): a Black/African American Resource Group; an Indigenous/Native American Resource Group; a Latinx/Hispanic American Resource Group; a Veterans Resource Group; and a Women’s Resource Group. Each BRG’s purpose is to promote the attraction, development, motivation and retention of members of traditionally underrepresented groups in our industry and workplace in an effort to drive positive business outcomes. A key factor in the success of our BRGs is the active participation by officer-level executive sponsors and allies from outside the BRG’s underrepresented populations. All employees are invited to become a supporter of one or more of our BRGs.
We embed D&I concepts into our core leadership development curriculum and sponsor a number of internal programs intended to promote D&I. In addition, we seek to give back to the communities where we operate by partnering on initiatives to support underrepresented community members and local charitable organizations.
Employee Safety - The safety of our employees is critical to our operations and success. By monitoring the integrity of our assets and promoting the safety of our employees, we are investing in the long-term sustainability of our businesses. We continuously assess the risks our employees face in their jobs, and we work to mitigate those risks through training, appropriate engineering controls, work procedures and other preventive safety programs. Reducing incidents and improving our personal safety incident rates are important, but we are not focused only on statistics. Low personal safety incident rates alone cannot prevent a large-scale incident, which is why we continue to focus on enhancing our Environmental, Safety and Health management systems and process safety programs, such as key risk/key control identification and knowledge sharing. We endeavor to operate our assets safely, reliably and in an environmentally responsible manner. We maintain mature and robust programs that guide trained staff in the completion of these activities, and we continue to enhance and improve these programs and our internal capabilities. In response to COVID-19, we have taken steps to manage the potential impacts of the COVID-19 outbreak on our employees. We continue to practice 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, workspace modifications, social distancing, face covering protocols and sanitation procedures. During 2020, ONEOK employees completed more than 50,000 hours of virtual and classroom training focused on employee safety.
Health and Welfare - We provide a variety of benefits to help promote the health and welfare of our employees and their families. These benefits include medical, dental and vision plans, virtual health visits and engagement of third-party service providers to offer company on-site and near-site clinics in several of our operating areas, which have access to both rapid antigen and polymerase chain reaction COVID-19 testing. In response to COVID-19, we provided temporary benefit adjustments, including waiving charges for virtual health visits, COVID-19 diagnostic tests and COVID-19 vaccines. Current resources include a dedicated employee information site that houses regular updates regarding COVID-19 and provides resources for prevention best practices, physical health, mental health and caregiver services. Eligible employees also have access, at no charge, to an employee assistance program, a medical second opinion service and a health care concierge service to assist with finding in-network providers and resolving claims. We offer full pay for maternity, paternity or adoption leave of up to 240 hours per qualifying event. We also provide up to $10,000 for reasonable and necessary expenses of a qualifying adoption. Additional benefits provided for the welfare of our employees include, among others, life insurance and long-term disability plans, health and dependent care flexible spending accounts, and full pay while on bereavement and personal and family care leave.
We also provide the opportunity for our employees to help fellow employees through the ONE Trust Fund by contributing donated vacation hours or monetary donations. The ONE Trust Fund is a nonprofit, charitable organization, that serves our employees in times of personal crises due to natural disasters, medical emergencies or other hardships.
Personal and Professional Development - We provide various options to assist with career growth and development. For employees just entering the workforce who desire to advance their career and continue to learn or for the professional who is interested in developing their skills, we provide education and training in a variety of areas, including leadership, functional and industry-specific topics, professional development and skill-building opportunities. Our organizational development and D&I teams provide live virtual classroom training, computer-based self-study and one-on-one coaching that is available to all employees.
We value education and assist eligible employees with the expense of furthering their education in job-related fields, including up to $5,000 per year in qualifying tuition expenses. We also may reimburse employees for certain job-related professional certification examination fees.
Recruiting - We make it a priority to attract, select, develop, motivate, challenge and retain the talent necessary to support our key business strategies. We use targeted recruitment events, maintain strong relationships with area technical schools, colleges
and universities, and we offer compensation benefits and career opportunities that are designed to position us as an employer of choice. In response to COVID-19, we continue to recruit and hire new employees for critical positions through virtual interviews. D&I continue to be a priority in recruiting, and we deploy sourcing strategies designed to access talent from groups that are historically underrepresented in our industry and workplace.
Retirement - We maintain a 401(k) Plan for our employees and match 100% of employee contributions up to 6% of eligible compensation, subject to applicable tax limits. We also have a defined benefit pension plan covering certain employees and former employees hired prior to January 1, 2005. Employees that do not participate in our defined benefit pension plan are eligible to receive quarterly and annual profit-sharing contributions under our 401(k) Plan. As of December 31, 2019,2020, approximately 96% of eligible employees were contributing to our 401(k) Plan. In first quarter 2020, we employed 2,684 people.opted into the CARES Act 401(k) penalty-free hardship withdrawal and loan deferral programs for employees. For additional information about our retirement benefits, see Note K of the Notes to Consolidated Financial Statements in this Annual Report.
INFORMATION ABOUT OUR EXECUTIVE OFFICERS
All executive officers are elected annually by our Board of Directors. Our executive officers listed below include the officers who have been designated by our Board of Directors as our Section 16 executive officers.
|
| | | | | | | | | | | | | | | | | | | |
Name and Position | | Age | | Business Experience in Past Five Years |
John W. Gibson | | 6668 |
| | 2011 to present | | Chairman of the Board, ONEOK |
Chairman of the Board | | | | 2007 to 2017 | | Chairman of the Board, ONEOK Partners |
| | | | 2007 to 2014 | | Chief Executive Officer, ONEOK and ONEOK Partners |
Terry K. Spencer | | 5961 |
| | 2014 to present | | President and Chief Executive Officer, ONEOK |
President and Chief Executive Officer | | | | 2014 to 2017 | | President and Chief Executive Officer, ONEOK Partners |
| | | | 2014 to present | | Member of the Board of Directors, ONEOK |
| | | | 2014 to 2017 | | Member of the Board of Directors, ONEOK Partners |
| | | | 2012 to 2014 | | President, ONEOK and ONEOK Partners |
Robert F. Martinovich | | 6163 |
| | 2015 to present | | Executive Vice President and Chief Administrative Officer, ONEOK |
Executive Vice President and Chief Administrative Officer | | | | 2015 to 2017 | | Executive Vice President and Chief Administrative Officer, ONEOK Partners |
| | | | 2014 to 2015 | | Executive Vice President, Commercial, ONEOK and ONEOK Partners |
| | | | 2013 to 2014 | | Executive Vice President, Operations, ONEOK and ONEOK Partners |
Walter S. Hulse III | | 5557 |
| 2019 to present | | Chief Financial Officer, Treasurer and Executive Vice President, Strategy and Corporate Affairs, ONEOK |
Chief Financial Officer, Treasurer and Executive Vice President, Strategy and Corporate Affairs | | | | 2017 to present2019 | | Chief Financial Officer and Executive Vice President, Strategic Planning and Corporate Affairs, ONEOK |
Chief Financial Officer, Executive Vice President, Strategic Planning and Corporate Affairs | | | | 2015 to 2017 | | Executive Vice President, Strategic Planning and Corporate Affairs, ONEOK and ONEOK Partners |
| | | | 2012 to 2015 | | Managing Member, Spinnaker Strategic Advisory Services, LLC |
Kevin L. Burdick | | 5456 |
| | 2017 to present | | Executive Vice President and Chief Operating Officer, ONEOK |
Executive Vice President and Chief Operating Officer | | | | 2017 | | Executive Vice President and Chief Commercial Officer, ONEOK and ONEOK Partners |
| | | | 2016 to 2017 | | Senior Vice President, Natural Gas Gathering and Processing, ONEOK Partners |
| | | | 2013 to 2016 | | Vice President, Natural Gas Gathering and Processing, ONEOK Partners |
Wesley J. Christensen | | 65 |
| | 2014 to present | | Senior Vice President, Operations, ONEOK |
Senior Vice President, Operations | | | | 2011 to 2017 | | Senior Vice President, Operations, ONEOK Partners |
Charles M. Kelley | | 6062 |
| | 2018 to present | | Senior Vice President, Natural Gas, ONEOK |
Senior Vice President, Natural Gas | | | | 2017 to 2018 | | Senior Vice President, Natural Gas Gathering & Processing, ONEOK |
| | | | 2015 to 2017 | | Senior Vice President, Corporate Planning and Development, ONEOK and ONEOK Partners |
| | | | 2014 to 2015 | | Vice President, Corporate Development, ONEOK and ONEOK Partners |
| | | | 2008 to 2014 | | Senior Vice President, Energy Services, ONEOK |
Sheridan C. Swords | | 4951 |
| | 20132017 to present | | Senior Vice President, Natural Gas Liquids, ONEOK |
Senior Vice President, Natural Gas Liquids | | | | 2013 to 2017 | | Senior Vice President, Natural Gas Liquids, ONEOK Partners |
Derek S. ReinersStephen B. Allen | | 47 |
| | 2017 to present | | Senior Vice President, Finance and Treasurer, ONEOK |
Senior Vice President, Finance and Treasurer | | | | 2013 to 2017 | | Senior Vice President, Chief Financial Officer and Treasurer, ONEOK and ONEOK Partners |
Stephen B. Allen | | 45 |
| | 2017 to present | | Senior Vice President, General Counsel and Assistant Secretary, ONEOK |
Senior Vice President, General Counsel and Assistant Secretary
| | | | 2008 to 2017 | | Vice President and Associate General Counsel, ONEOK and ONEOK Partners |
Sheppard F. Miers IIIMary M. Spears | | 5041 |
| | 20132019 to present | | Vice President and Chief Accounting Officer, ONEOK |
Vice President and Chief Accounting Officer | | | | 20132015 to 2019 | | Director, SEC Reporting, ONEOK |
| | | | 2015 to 2017 | | Vice President and Chief Accounting Officer,Director, SEC Reporting, ONEOK Partners |
No family relationships exist between any of the executive officers, nor is there any arrangement or understanding between any executive officer and any other person pursuant to which the officer was selected.
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, BylawsCorporate Sustainability Report, 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.
ITEM 1A. RISK FACTORS
Our investors should consider the following risks that could affect us and our business. Although we have tried to identify key factors, our investors need to be aware that other risks may prove to be important in the future. New risks may emerge at any time, and we cannot predict such risks or estimate the extent to which they may affect our financial performance. Investors should consider carefully the following discussion of risks and the other information included or incorporated by reference in this Annual Report, including “Forward-Looking Statements,” which are included in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.
RISKS INHERENT INRISK FACTORS RELATED TO OUR BUSINESS AND INDUSTRY
The COVID-19 pandemic has affected adversely, and could further affect adversely, our results of operations.
The COVID-19 pandemic led to global and regional economic disruption, volatility in the financial markets and a weakened commodity price environment. The outbreak and government measures taken in response, including extended quarantines, closures and reduced operations of businesses had a significant adverse impact, both direct and indirect, on our business and the economy. Due to reductions in economic activity, the world experienced reduced demand for crude oil, refined products, NGLs and natural gas, and weakened commodity prices, which affected adversely our operations.
Uncertainty remains regarding the duration of global impacts due to COVID-19 and the possible resurgence or mutation of the virus. This uncertainty, and the occurrence of these events and measures taken in response, could further affect adversely our results of operations by, among other things, reducing demand for the services we provide, impacting our supply chains and the availability and efficiency of our workforce, creating operational challenges and impacting our ability to access capital markets. The degree to which the pandemic further impacts our business and results of operations will depend on future developments beyond our control, including the success of actions to contain the virus, the length of time needed to vaccinate a significant segment of the global population, how quickly and to what extent normal economic and operating conditions can resume, and the severity and duration of the global and regional economic downturn that results from the pandemic.
If the level of drilling in the regions in which we operate declines substantially near our assets, our volumes and revenues could decline.
Our gathering and transportation pipeline systems are connected to, and dependent on the level ofupon production from natural gas and crude oil wells, from which production will naturally declinedeclines over time. As a result, our cash flows associated with these wells will also decline over time. In order to maintain or increase throughput levels on our gathering and transportation pipeline systems and the asset utilization rates at our processing and fractionation plants,facilities, we must continually obtain new supplies. Our ability to maintain or expand our businesses depends largely on the level of drilling and production by third parties in the regions in which we operate. Our natural gas and NGL supply volumes may be impacted if producers curtail or redirect drilling and production activities. Drilling and production are impacted by factors beyond our control, including:
•demand and prices for natural gas, NGLs and crude oil;
•producers’ access to capital;
•producers’ finding and development costs of reserves;
•producers’ desire and ability to obtain necessary permits, drilling rights and surface access in a timely manner;manner and on reasonable terms;
•crude oil and associated natural gas field characteristics and production performance; and
surface access, requirements to secure drilling rights and infrastructure issues; and
•capacity constraints and/or shut downs on the pipelines that transport crude oil, natural gas crude oil and natural gas liquids infrastructureNGLs from the producing areas and our facilities.
Commodity prices have experienced significant volatility. Drilling and production activity levels may vary across our geographic areas; however, a prolonged period of low commodity prices may reduce drilling and production activities across all areas. If we are not able to obtain new supplies to replace the natural decline in volumes from existing wells or because of competition, throughput on our gathering and transportation pipeline systems and the utilization rates of our processing and fractionation facilities would decline, which could have a material adverse effect onaffect adversely our business, results of operations, financial position and cash flows, and our ability to pay cash dividends.
Our operating results may be affected adversely by unfavorable economic and market conditions.
In addition to impacts from the COVID-19 pandemic, an adverse change in economic conditions worldwide or in the economic regions in which we operate could negatively affect the crude oil and natural gas markets, as well as in the specific segments in which we operate, resulting in reduced demand and increased price competition for our services and products. Our operating results in one or more geographic regions may also be affected by uncertain or changing economic conditions within that region. Volatility in commodity prices may have an impact on many of our suppliers and customers, which, in turn, could have a negative impact on their ability to meet their obligations to us. Periods of severe volatility in equity and credit markets may disrupt our access to such markets, make it difficult to obtain financing necessary to expand facilities or acquire assets, increase financing costs and result in the imposition of restrictive financial covenants. If adverse global or regional economic and market conditions remain uncertain or persist, spread or deteriorate further, we may experience material impacts on our business, results of operations, financial position, cash flows and liquidity.
The volatility of natural gas, crude oil and NGL prices could affect adversely our earnings and cash flows.
Lower commodity prices could reduce crude oil, natural gas and NGL production which could decrease the demand for our services. Additionally, a significant portion of our revenues are derived from the sale of commodities that are received in conjunction with natural gas gathering and processing services, the transportation and storage of natural gas, and from the purchase and sale of NGLs and NGL products. As commodity prices decline, we could be paid less for our commodities thereby reducing our cash flows. Historically, commodity prices have been volatile and can change quickly. 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. It is likely that commodity prices will continue to be volatile in the future.
The prices we receive for our commodities are subject to wide fluctuations in response to a variety of factors beyond our control, including, but not limited to, the following:
•overall domestic and global economic conditions;
•relatively minor changes in the supply of, and demand for, domestic and foreign energy;
•market uncertainty;
•geopolitical conditions impacting supply and demand for natural gas, NGLs and crude oil;
•production decisions by other countries, such as the failure of countries to abide by recent agreements to reduce production volumes;
•the availability and cost of third-party transportation, natural gas processing and fractionation capacity;
•the level of consumer product demand and storage inventory levels;
•ethane rejection;
•weather conditions;
•domestic and foreign governmental regulations and taxes;
•the price and availability of alternative fuels;
•speculation in the commodity futures markets;
•the effects of imports and exports on the price of natural gas, crude oil, NGL and liquefied natural gas;
•the effect of worldwide energy-conservation measures;
•the impact of new supplies, new pipelines, processing and fractionation facilities on location price differentials; and
•technology and improved efficiency impacting supply and demand for natural gas, NGLs and crude oil.
These external factors and the volatile nature of the energy markets make it difficult to reliably estimate future prices of commodities and the impact commodity price fluctuations have on our customers and their need for our services, which could affect adversely our business, results of operations, financial position and cash flows.
We may be subject to physical and financial risks associated with climate change and changes in investor sentiment towards climate change may affect the demand for our securities.
Changes in regulatory policies, public sentiment or technology due to the threat of climate change that result in a reduction in the demand for hydrocarbon products, restrictions on their use, or increased use of renewable energy could reduce future demand for hydrocarbons and reduce volumes available to us for gathering, processing, fractionation, transportation, storage and marketing. Finally, increasing attention to climate change and the impacts of GHG emissions has resulted in an increased likelihood of governmental investigations, regulation and private litigation, which could increase our costs or otherwise affect adversely our business.
Due to climate change concerns, some investors may choose to either not invest, or to reduce their investment, in companies that explore for, produce, process, transport or sell products derived from hydrocarbons. If this investor sentiment increases, we may see reduced demand for our securities, which could impact our liquidity or the value of our securities. In addition, to the extent financial markets view climate change and emissions of GHGs as a financial risk, this could affect negatively our ability to access capital markets or cause us to receive less favorable terms and conditions in future financings.
The threat of global climate change may create physical and financial risks to our business. Our customers’ energy needs vary with weather conditions, primarily temperature and humidity. For residential customers, heating and cooling represent their largest energy use. To the extent weather conditions may be affected by climate change, customers’ energy use could increase or decrease depending on the duration and magnitude of any changes. Increased energy use due to weather changes may require us to invest in more pipelines and other infrastructure to serve increased demand. A decrease in energy use due to weather changes may affect our financial condition, through decreased revenues. Extreme weather conditions in general require more system backup, adding to costs, and can contribute to increased system stresses, including service interruptions. Weather conditions outside of our operating territory could also have an impact on our revenues. Severe weather impacts our operating territories primarily through hurricanes, thunderstorms, tornados and snow or ice storms. To the extent the frequency of extreme weather events increases, this could increase our cost of providing service. We may not be able to pass on the higher costs to our customers or recover all costs related to mitigating these physical risks.
Our operations are subject to operational hazards and unforeseen interruptions, which could affect adversely our business and for which we may not be adequately insured.
Our operations are subject to all the risks and hazards typically associated with the operation of natural gas and NGL gathering, transportation and distribution pipelines, storage facilities and processing and fractionation facilities, which include, but are not limited to, leaks, pipeline ruptures, the breakdown or failure of equipment or processes and the performance of facilities below expected levels of capacity and efficiency. Other operational hazards and unforeseen interruptions include adverse weather conditions, infectious disease including a pandemic, geopolitical reactions, accidents, explosions, fires, the collision of equipment with our pipeline facilities (for example, this may occur if a third party were to perform excavation or construction work near our facilities) and catastrophic events such as tornados, hurricanes, earthquakes, floods, and other similar events beyond our control. Also, the United States government warned that energy assets, specifically the nation’s pipeline infrastructure, may be targets of terrorist attacks. An act of terrorism could target our facilities, those of our suppliers or customers or those of other pipelines. A casualty occurrence may result in injury or loss of life, extensive property damage or environmental damage. Liabilities incurred and interruptions to the operations of our pipeline or other facilities caused by such an event could reduce our revenues and increase expenses, thereby impairing our ability to meet our obligations.
As a result of market conditions, premiums and deductibles for certain insurance policies can increase substantially, and, in some instances, certain insurance may become unavailable or available only for reduced amounts of coverage. Consequently, we may not be able to renew existing insurance policies or purchase other desirable insurance on commercially reasonable terms, if at all. Insurance proceeds may not be adequate to cover all liabilities or expenses incurred or revenues lost, and we are not fully insured against all risks inherent to our business. If we were to incur a significant liability for which we were not fully insured, it could affect adversely our business, results of operations, financial position and cash flows. Further, the proceeds of any such insurance may not be paid in a timely manner.
Continued development of supply sources outside of our operating regions could impact demand for our services.
Natural gas productionProduction areas outside of our operating regions near certain market areas that we serve may compete with natural gas and NGL supply originating in production areas connected to our systems. For example, the Marcellus Shalesystems, which may cause natural gas and NGLs in supply areas connected to our systems to be diverted to markets other than our traditional market areas and may affect capacity utilization adversely on our pipeline systems and our ability to renew or replace existing contracts at rates sufficient to maintain current revenues and cash flows. In addition, supply volumes from other natural gas production areas may compete with and displace volumes from the Mid-Continent, Permian, Rocky Mountains and Canadian supply sources in certain of our markets.contracts. In our Natural Gas Gathering and Processing segment, the development of reserves could move drilling rigs from our current service areas to other areas, which may reduce demand for our services. In our Natural Gas Pipelines segment, the displacement of natural gas originating in supply areas connected to our pipeline systems by supply sources that are closer to the end-use markets could reduce demand for our services. Either of these possibilities could result in lower transportation revenues, which could have a material adverse impact onaffect adversely our business, financial condition, results of operations, financial position and cash flows.
We do not hedge fully against commodity price risk or interest rate risk, including commodity price changes, seasonal price differentials, product price differentials or location price differentials. This could result in decreased revenues, increased costs and capital availability could affectlower margins, affecting adversely our business.results of operations.
The capitalCertain of our businesses are exposed to market risk and global credit markets have experienced volatilitythe impact of market fluctuations in natural gas, NGLs and disruptioncrude oil prices. Market risk refers to the risk of loss of future cash flows and earnings arising from adverse changes in commodity prices. Our primary commodity price exposures arise from:
•the value of the commodities sold under fee with POP contracts of which we retain a portion of the sales proceeds;
•the price differentials between the individual NGL products with respect to our NGL transportation and fractionation agreements;
•the location price differentials in the past. In many cases during these periods, price of natural gas and NGLs;
•the capital markets have exerted downward pressure on equity valuesseasonal price differentials in natural gas and reduced NGLs related to our storage operations;
•the credit capacity for certain companies. Much ofprice risk related to electric costs to operate our business is capital intensive,facilities; and our ability to grow is dependent, in part, upon our ability to access capital at rates and on terms we determine to be attractive. Similar or more severe levels of global market disruption and volatility may have an adverse effect on us resulting from, but not limited to, disruption of our access to capital and credit
markets, difficulty in obtaining financing necessary to expand facilities or acquire assets, increased financing•the fuel costs and increasingly restrictive covenants. Ifthe value of the retained fuel in-kind in our natural gas pipelines and storage operations.
To manage the risk from market price fluctuations in natural gas, NGLs and crude oil prices, we may use derivative instruments such as swaps, futures, forwards and options. However, we do not hedge fully against commodity price changes, and we therefore retain some exposure to market risk. Further, hedging instruments that are unableused to access capital at competitive rates,reduce our strategyexposure to interest-rate fluctuations could expose us to risk of enhancingfinancial loss where we may contract for fixed-rate swap instruments to hedge variable-rate instruments and the earnings potential offixed rate exceeds the variable rate. Finally, hedging arrangements for forecasted sales and purchases are used to reduce our existing assets, including through capital-growth projectsexposure to commodity price fluctuations and acquisitions of complementary assets or businesses, may be affected adversely. A number of factors could affect adversely our ability to access capital, including: (i) general economic conditions; (ii) capital market conditions; (iii)limit the benefit we would otherwise receive if market prices for natural gas, crude oil and NGLs differ from the stated price in the hedge instrument for these commodities.
A breach of information security, including a cybersecurity attack, or failure of one or more key information technology or operational systems, or those of third parties, may affect adversely our operations, financial results or reputation.
Our businesses are dependent upon our operational systems to process a large amount of data and complex transactions. The various uses of these information technology systems, networks and services include, but are not limited to:
•controlling our plants and pipelines with industrial control systems including Supervisory Control and Data Acquisition (SCADA);
•collecting and storing customer, employee, investor and other hydrocarbons; (iv) the overall healthstakeholder information and data;
•processing transactions;
•summarizing and reporting results of the energyoperations;
•hosting, processing and related industries; (v) abilitysharing confidential and proprietary research, business plans and financial information;
•complying with regulatory, legal, financial or tax requirements;
•providing data security; and
•other processes necessary to maintain investment-grade credit ratings; (vi) share pricemanage our business.
If any of our systems are damaged, fail to function properly or otherwise become unavailable, we may incur substantial costs to repair or replace them and (vii) capital structure. Ifmay experience loss or corruption of critical data and interruptions or delays in our ability to access capital becomes constrained significantly, our interest costs and cost of equity will likely increase andperform critical functions, which could affect adversely our financial conditionbusiness and future results of operations.
Our operatingfinancial results may be affected materially and adversely by unfavorable economic and market conditions.
Economic conditions worldwide have from time to time contributed to slowdowns in the crude oil and natural gas industry, as well as in the specific segments and markets in which we operate, resulting in reduced demand and increased price competition for our products and services. Our operating results in one or more geographic regions maycould also be affected adversely if an individual causes our operational systems to fail, either as a result of inadvertent error or by uncertaindeliberately tampering with or changing economic conditions withinmanipulating our operational systems. In addition, dependence upon automated systems may further increase the risk that region. Volatilityoperational system flaws, employee tampering or manipulation of those systems will result in commodity priceslosses that are difficult to detect.
Due to increased technology advances and an increase in remote work arrangements due to the COVID-19 pandemic, we have become more reliant on technology to help increase efficiency in our businesses. We use software to help manage and operate our businesses, and this may have an impact on manysubject us to increased risks. According to experts, since the beginning of our customers, which, in turn, could havethe COVID-19 pandemic there has been a negative impact on their ability to meet their obligations to us. If global economic and market conditions (including volatility in commodity markets) or economic conditionsrise in the United Statesnumber and sophistication of cyberattacks on companies’ network and information systems by both state-sponsored and criminal organizations, and as a result, the risks associated with such an event continue to increase. A significant failure, compromise, breach or other key markets remain uncertain or persist, spread or deteriorate further, we may experience material impacts oninterruption in our business, financial condition, results of operations and liquidity.
Increased competition could have a significant adverse financial impact on our business.
The natural gas and natural gas liquids industries are expected to remain highly competitive. The demand for natural gas and NGLs is primarily a function of commodity prices, including prices for alternative energy sources, customer usage rates, weather, economic conditions and service costs. Our ability to compete also depends on a number of other factors, including competition from other companies for our existing customers; the efficiency, quality and reliability of the services we provide; and competition for throughput at our gathering systems pipelines, processing plants, fractionators and storage facilities.
Increased regulation of exploration and production activities, including hydraulic fracturing and disposal of waste water, could result in reductionsa disruption of our operations, physical damages, customer dissatisfaction, damage to our reputation and a loss of customers or delaysrevenues. If any such failure, interruption or similar event results in drilling and completing new crude oil and natural gas wells, which could impact adversely our earnings by decreasing the volumesimproper disclosure of natural gas and NGLs transported on our or our joint ventures’ natural gas and natural gas liquids pipelines.
The natural gas industry is relying increasingly on natural gas supplies from nonconventional sources, such as shale and tight sands. Natural gas extracted from these sources frequently requires hydraulic fracturing, which involves the pressurized injection of water, sand and chemicals into a geologic formation to stimulate crude oil and natural gas production. Legislation or regulations placing restrictions on exploration and production activities, including hydraulic fracturing and disposal of waste water, could impose operational delays, increase operating costs and additional regulatory burdens on exploration and production operators, which could reduce their production of unprocessed natural gas and, in turn, affect adversely our revenues and results of operations by decreasing the volumes of unprocessed natural gas and NGLs gathered, treated, processed, fractionated and transported on our or our joint ventures’ natural gas and natural gas liquids pipelines, which primarily gather unprocessed natural gas from areas where the use of hydraulic fracturing is prevalent.
In the competition for supply, we may have significant levels of excess capacity on our natural gas and natural gas liquids pipelines, processing, fractionation and storage assets.
Our natural gas and natural gas liquids pipelines, processing, fractionation and storage assets compete with other pipelines, processing, fractionation and storage facilities for natural gas and NGL supply delivered to the markets we serve. As a result of competition, we may have significant levels of uncontracted or discounted capacity on our pipelines, processing, fractionation andinformation maintained in our storage assets, whichinformation systems and networks or those of our vendors, including personnel, customer and vendor information, we could have a material adverse impact onalso be subject to liability under relevant contractual obligations and laws and regulations protecting personal data and privacy. Efforts by us and our results of operationsvendors to develop, implement and cash flows.
Wemaintain security measures may not be ablesuccessful in preventing these events from occurring, and any network and information systems-related events could require us to replace, extend or add additional contracted volumes on favorable terms, or at all, which could affect our financial condition,expend significant resources to remedy
such event. Cybersecurity, physical security and the amount of cash available to pay dividendscontinued development and our ability to grow.
Although manyenhancement of our customerscontrols, processes and suppliers are subjectpractices designed to long-term contracts, ifprotect our enterprise, information systems and data from attack, damage or unauthorized access and to identify and appropriately report cyberattacks, remain a priority for us. Although we are unablebelieve that we have robust information security procedures and other safeguards in place, as cyberthreats continue to replace evolve, we may be required to expend additional resources to continue to enhance our information security measures and/or extend such contracts, add additional customersto investigate and suppliersremediate information security vulnerabilities.
Cyberattacks against us or otherwise increase the contracted volumes of natural gas and NGLs provided to us by current producers, our financial condition, growth plans and the amount of cash available to pay dividends could be affected adversely. Our ability to replace, extend or add additional customer or supplier contracts, or increase contracted volumes of natural gas and NGLs from current producers, on favorable terms, or at all, is subject to a number of factors, some of which are beyond our control, including:
the level of existing and new competitionothers in our businesses or from alternative fuel sources,industry could result in additional regulations. Current efforts by the federal government, such as electricity, fuel oils or nuclear energy;
natural gasthe Improving Critical Infrastructure Cybersecurity executive order, and NGL prices, demand, availability; and
margins in our markets.
We may face opposition to the construction or operation of our pipelines and facilities from various groups.
We may face opposition to the construction or operation of our pipelines and facilities from environmental groups, landowners, tribal groups, local groups and other advocates. Such opposition could take many forms, including organized protests, attempts to block or sabotage our construction activities or operations, intervention in regulatory or administrative proceedings involving our assets, or lawsuits or other actions designed to prevent, disrupt or delay the construction or operation of our assets and business. For example, constructing our pipelines often involves securing consent from individual landowners to access their property; one or more landowners may resist our efforts, whichany potential future regulations could lead to delays inincreased regulatory compliance costs, insurance coverage cost or capital expenditures. We cannot predict the construction of assets for a period of time that is significantly longer than would have otherwise been the case. In addition, acts of sabotage or terrorism could cause significant damage or injurypotential impact to people, propertyour business or the environment or lead to extended interruptions of our operations. Any such event that delays or interrupts the construction or operation of assets or revenues generated by our existing operations, or which causes us to make significant expenditures not covered by insurance, could affect adversely our financial condition, results of operations, cash flows and our share price.energy industry resulting from additional regulations.
Growing our business by constructing new pipelines and plantsfacilities or making modifications to our existing facilities subjects us to construction risk and supply risks, should adequate natural gas or NGL supply be unavailable upon completion of the facilities.
One of the waysTo expand our business, we may grow our businesses is through the construction ofregularly construct new pipelines and new gathering, processing, storage and fractionation facilities and through modifications to ourmodify or expand existing pipelines and existing gathering, processing, storage and fractionation facilities. The construction and modification of pipelines and gathering, processing, storage and fractionationthese facilities may faceinvolve the following risks:
•projects may require significant capital expenditures, which may exceed our estimates, and involvesinvolve numerous regulatory, environmental, political, legal and weather-related uncertainties;
•projects may increase demand for labor, materials and rights of way, which may, in turn, affect our costs and schedule;
•we may be unable to obtain new rights of way to connect new natural gas or NGL supplies to our existing gathering or transportation pipelines;
•if we undertake these projects, we may not be able to complete them on schedule or at the budgeted cost;
•our revenues may not increase immediately upon the expenditure of funds on a particular project. For instance, if we build a new pipeline, the construction will occur over an extended period of time, and we will not receive any material increases in revenues until after completion of the project;
•we may construct facilities to capture anticipated future growth in production in a region in which anticipated production growth does not materialize;
•opposition from environmental and social groups, landowners, tribal groups, local groups and other advocates could result in organized protests, attempts to block or sabotage our construction activities or operations, intervention in regulatory or administrative proceedings involving our assets, or lawsuits or other actions designed to prevent, disrupt or delay the construction or operation of our assets; and
•we may be required to rely on third parties downstream of our facilities to have available capacity for our delivered natural gas or NGLs, which may not yet be operational.
As a result, new facilities may not be able to attract enough natural gas or NGLs to achieve our expected investment return, which could affect materially and adversely our business, results of operations, financial conditionposition and cash flows.
Estimates of hydrocarbon reserves may be inaccurate, which could result in lower than anticipated volumes.
We may not be able to accurately estimate hydrocarbon reserves and production volumes expected to be delivered to us for a variety of reasons, including the unavailability of sufficiently detailed information and unanticipated changes in producers’ expected drilling schedules. Accordingly, we may not have accurate estimates of total reserves serviced by our assets, the
anticipated life of such reserves or the expected volumes to be produced from those reserves. In such event, if we are unable to secure additional sources, then the volumes that we gather or process in the future could be less than anticipated. A decline in such volumes could have a material adverse effect onaffect adversely our business, results of operations, and financial condition.
The volatility of natural gas, crude oil and NGL prices could affect adversely our earningsposition and cash flows.
A significant portion of our revenues are derived from the sale of commodities that are received in conjunction with natural gas gathering and processing services, the transportation and storage of natural gas, and from the purchase and sale of NGLs and NGL products. Commodity prices have been volatile and are likely to continue to be so in the future. The prices we receive for our commodities are subject to wide fluctuations in response to a variety of factors beyond our control, including, but not limited to, the following:
overall domestic and global economic conditions;
relatively minor changes in the supply of, and demand for, domestic and foreign energy;
market uncertainty;
the availability and cost of third-party transportation, natural gas processing and fractionation capacity;
the level of consumer product demand and storage inventory levels;
ethane rejection;
geopolitical conditions impacting supply and demand for natural gas, NGLs and crude oil;
weather conditions;
domestic and foreign governmental regulations and taxes;
the price and availability of alternative fuels;
speculation in the commodity futures markets;
the effects of imports and exports on the price of natural gas, crude oil, NGL and liquefied natural gas;
the effect of worldwide energy-conservation measures;
the impact of new supplies, new pipelines, processing and fractionation facilities on location price differentials; and
technology and improved efficiency impacting supply and demand for natural gas, NGLs and crude oil.
These external factors and the volatile nature of the energy markets make it difficult to reliably estimate future prices of commodities and the impact commodity price fluctuations have on our customers and their need for our services, which could have a material adverse effect on our earnings and cash flows. As commodity prices decline, we could be paid less for our commodities, thereby reducing our cash flows. In addition, crude oil, natural gas and NGL production could also decline due to lower prices.
Our operations are subject to operational hazards and unforeseen interruptions, which could affect materially and adversely our business and for which we may not be adequately insured.
Our operations are subject to all of the risks and hazards typically associated with the operation of natural gas and natural gas liquids gathering, transportation and distribution pipelines, storage facilities and processing and fractionation plants. Operating risks include, but are not limited to, leaks, pipeline ruptures, the breakdown or failure of equipment or processes and the performance of pipeline facilities below expected levels of capacity and efficiency. Other operational hazards and unforeseen interruptions include adverse weather conditions, accidents, explosions, fires, the collision of equipment with our pipeline facilities (for example, this may occur if a third party were to perform excavation or construction work near our facilities) and catastrophic events such as tornados, hurricanes, earthquakes, floods or other similar events beyond our control. It is also possible that our facilities could be direct targets or indirect casualties of an act of terrorism. A casualty occurrence might result in injury or loss of life, extensive property damage or environmental damage. Liabilities incurred and interruptions to the operations of our pipeline or other facilities caused by such an event could reduce revenues generated by us and increase expenses, thereby impairing our ability to meet our obligations. Insurance proceeds may not be adequate to cover all liabilities or expenses incurred or revenues lost, and we are not fully insured against all risks inherent to our business.
As a result of market conditions, premiums and deductibles for certain insurance policies can increase substantially, and, in some instances, certain insurance may become unavailable or available only for reduced amounts of coverage. Consequently, we may not be able to renew existing insurance policies or purchase other desirable insurance on commercially reasonable terms, if at all. If we were to incur a significant liability for which we were not fully insured, it could have a material adverse effect on our financial position, cash flows and results of operations. Further, the proceeds of any such insurance may not be paid in a timely manner and may be insufficient if such an event were to occur.
We may not be able to develop and execute growth projects and acquire new assets, which could result in reduced dividends to our shareholders.
Our ability to maintain and grow our dividends paid to our shareholders depends on the growth of our existing businesses and strategic acquisitions. Our ability to make strategic acquisitions and investments will depend on:
the extent to which acquisitions and investment opportunities become available;
our success in bidding for the opportunities that do become available;
regulatory approval, if required, of the acquisitions or investments on favorable terms; and
our access to capital, including our ability to use our equity in acquisitions or investments, and the terms upon which we obtain capital.
Our ability to develop and execute growth projects will depend on our ability to implement business development opportunities and finance such activities on economically acceptable terms.
If we are unable to make strategic acquisitions and investments, integrate successfully businesses that we acquire with our existing business, or develop and execute our growth projects, our future growth will be limited, which could impact adversely our results of operations and cash flows and, accordingly, result in reduced cash dividends over time.
Acquisitions that appear to be accretive may nevertheless reduce our cash from operations on a per-share basis.
Any acquisition involves potential risks that may include, among other things:
inaccurate assumptions about volumes, revenues and costs, including potential synergies;
an inability to integrate successfully the businesses we acquire;
decrease in our liquidity as a result of our using a significant portion of our available cash or borrowing capacity to finance the acquisition;
a significant increase in our interest expense and/or financial leverage if we incur additional debt to finance the acquisition;
the assumption of unknown liabilities for which we are not indemnified, our indemnity is inadequate or our insurance policies may exclude from coverage;
an inability to hire, train or retain qualified personnel to manage and operate the acquired business and assets;
limitations on rights to indemnity from the seller;
inaccurate assumptions about the overall costs of equity or debt;
the diversion of management’s and employees’ attention from other business concerns;
unforeseen difficulties operating in new product areas or new geographic areas;
increased regulatory burdens;
customer or key employee losses at an acquired business; and
increased regulatory requirements.
If we consummate any future acquisitions, our capitalization and results of operations may change significantly, and investors will not have the opportunity to evaluate the economic, financial and other relevant information that we will consider in determining the application of our resources to future acquisitions.
Mergers between our customers, suppliers and competitors could result in lower volumes being gathered, processed, fractionated, transported or stored on our assets, thereby reducing the amount of cash we generate.
Mergers between our existing customers, suppliers and our competitors could provide strong economic incentives for the combined entities to utilize their existing gathering, processing, fractionation and/or transportation systems instead of ours in those markets where the systems compete. As a result, we could lose some or all of the volumes and associated revenues from these counterparties, and we could experience difficulty in replacing those lost volumes. A reduction in volumes could result not only in lower net income but also in a decline in cash flows, which would reduce our ability to pay cash dividends to our shareholders.
We do not own all of the land on which our pipelines and facilities are located, and we lease certain facilities and equipment, which could disrupt our operations.
We do not own all of the land on which certain of our pipelines and facilities are located, and we are, therefore, subject to the risk of increased costs to maintain necessary land use. We obtain the rights to construct and operate certain of our pipelines and related facilities on land owned by third parties and governmental agencies for a specific period of time. Our loss of these
rights, through our inability to renew right-of-way contracts on acceptable terms or increased costs to renew such rights, could have a material adverse effect onaffect adversely our financial condition,business, results of operations, financial position and cash flows.
Measurement adjustments on our pipeline system may be impacted materially by changes in estimation, type of commodity and other factors.
Natural gas and NGL measurement adjustments occur as part of the normal operating conditions associated with our assets. The quantification and resolution of measurement adjustments are complicated by several factors including: (i) the significant quantities (i.e., thousands) of measurement equipment that we use across our natural gas and NGL systems, primarily around our gathering and processing assets; (ii) varying qualities of natural gas in the streams gathered and processed through our systems and the mixed nature of NGLs gathered and fractionated; and (iii) variances in measurement that are inherent in metering technologies. Each of these factors may contribute to measurement adjustments that may occur on our systems, which could affect adversely our business, results of operations, financial position and cash flows.
In the competition for supply, we may have significant levels of excess capacity on our natural gas and NGL pipelines, processing, fractionation and storage assets.
Our natural gas and NGL pipelines, processing, fractionation and storage assets compete with other pipelines, processing, fractionation and storage assets for natural gas and NGL supply delivered to the markets we serve. As a result of competition, we may have significant levels of uncontracted or discounted capacity on our assets, which could affect adversely our business, results of operations, financial position and cash flows.
Many of our assets have been in service for several decades.
Many of our pipeline and storage assets are designed as long-lived assets. Over time the age of these assets could result in increased maintenance or remediation expenditures and an increased risk of product releases and associated costs and liabilities. Any significant increase in these expenditures, costs or liabilities could affect adversely our business, results of operations, financial position and cash flows, as well as our ability to pay cash dividends.
Our operating cash flows are derived partially from cash distributions we receive from our unconsolidated affiliates.
Our operating cash flows are derived partially from cash distributions we receive from our unconsolidated affiliates, as discussed in Note M of the Notes to Consolidated Financial Statements in this Annual Report. The amount of cash that our unconsolidated affiliates can distribute principally depends upon the amount of cash flows these affiliates generate from their respective operations, which may fluctuate from quarter to quarter. We do not have any direct control over the cash distribution policies of our unconsolidated affiliates. This lack of control may contribute to us not having sufficient available cash each quarter to continue paying dividends at the current levels.
Additionally, the amount of cash that we have available for cash dividends depends primarily upon our cash flows, including working capital borrowings, and is not solely a function of profitability, which will be affected by noncash items such as depreciation, amortization and provisions for asset impairments. As a result, we may be able to pay cash dividends during periods when we record losses and may not be able to pay cash dividends during periods when we record net income.
We may be unable to cause our joint ventures to take or not to take certain actions unless some or all of our joint-venture participants agree.
We participate in several joint ventures. Due to the nature of some of these arrangements, each participant in these joint ventures has made substantial investments in the joint venture and, accordingly, has required that the relevant charter documents contain certain features designed to provide each participant with the opportunity to participate in the management of the joint venture and to protect its investment, as well as any other assets that may be substantially dependent on or otherwise affected by the activities of that joint venture. These participation and protective features customarily include a corporate governance structure that requires at least a majority-in-interest vote to authorize many basic activities and requires a greater voting interest (sometimes up to 100%) to authorize more significant activities. Examples of these more significant activities are large expenditures or contractual commitments, the construction or acquisition of assets, borrowing money or otherwise raising capital, transactions with affiliates of a joint-venture participant, litigation and transactions not in the ordinary course of business, among others. Thus, without the concurrence of joint-venture participants with enough voting interests, we may be unable to cause any of our joint ventures to take or not to take certain actions, even though those actions may be in the best interest of us or the particular joint venture.
Moreover, subject to contractual restrictions, any joint-venture owner generally may sell, transfer or otherwise modify its ownership interest in a joint venture, whether in a transaction involving third parties or the other joint-venture owners. Any
such transaction could result in us being required to partner with different or additional parties who may have business interests different from ours.
We do not operate all of our joint-venture assets nor do we employ directly all of the persons responsible for providing administrative, operating and management services. This reliance on others to operate joint-venture assets and to provide other services could affect adversely our business and results of operations.
We rely on others to provide administrative, operating and management services for certain of our joint-venture assets. We have a limited ability to control the operations and the associated costs of such operations. The success of these operations depends on a number of factors that are outside our control, including the competence and financial resources of the operator or an outsourced service provider. We may have to contract elsewhere for outsourced services, which may cost more than we are currently paying. In addition, we may not be able to obtain the same level or kind of service or retain or receive the services in a timely manner, which may impact our ability to perform under our contracts and affect adversely our business and results of operations.
RISK FACTORS RELATED TO REGULATION
Increased regulation of exploration and production activities, including hydraulic fracturing, well setbacks and disposal of wastewater, could result in reductions or delays in drilling and completing new crude oil and natural gas wells.
The crude oil and natural gas industry is relying increasingly on supplies from nonconventional sources, such as shale and tight sands. Natural gas extracted from these sources frequently requires hydraulic fracturing, which involves the pressurized injection of water, sand and chemicals into a geologic formation to stimulate crude oil and natural gas production. Legislation or regulations placing restrictions on exploration and production activities, including hydraulic fracturing and disposal of wastewater, could result in operational delays, increased operating costs and additional regulatory burdens on exploration and production operators. Any of these factors could reduce their production of unprocessed natural gas and, in turn, affect adversely our revenues and results of operations by decreasing the volumes of natural gas and NGLs gathered, treated, processed, fractionated and transported on our or our joint ventures’ assets.
Our business is subject to regulatory oversight and potential penalties.
The energy industry historically has been subject to heavy state and federal regulation that extends to many aspects of our businesses and operations, including:
•regulatory approval and review of certain of our rates, operating terms and conditions of service;
•the types of services we may offer our counterparties;
•construction and operation of new facilities;
•the integrity, safety and security of facilities and operations;
•acquisition, extension or abandonment of services or facilities;
•reporting and information posting requirements;
•maintenance of accounts and records; and
•relationships with affiliate companies involved in all aspects of the natural gas and energy businesses.
Compliance with these requirements can be costly and burdensome. Future changes to laws, regulations and policies in these areas may impair our ability to compete for business or to recover costs and may increase the cost and burden of our operations. We cannot guarantee that state or federal regulators will not challenge our safety practices or will authorize any projects or acquisitions that we may propose in the future. Moreover, there can be no guarantee that, if granted, any such authorizations will be made in a timely manner or will be free from potentially burdensome conditions.
Under the Natural Gas Act, which is applicable to our interstate natural gas pipelines, and the Interstate Commerce Act, which is applicable to our NGL pipelines, our interstate transportation rates are regulated by the FERC and many changes to our pipeline tariffs must be approved in a regulatory proceeding. Additionally, shippers, the FERC and/or state regulatory agencies may investigate our tariff rates which could result in, among other things, being ordered to reduce rates or make refunds to shippers.
Failure to comply with all applicable state or federal statutes, rules and regulations and orders could bring substantial penalties and fines.
We may face significant costs to comply with the regulation of GHG emissions.
GHG emissions originate primarily from combustion engine exhaust, heater exhaust and fugitive methane gas emissions. International, federal, regional and/or state legislative and/or regulatory initiatives may attempt to control or limit GHG emissions, including initiatives directed at issues associated with climate change. Various federal and state legislative proposals have been introduced to regulate the emission of GHGs, particularly carbon dioxide and methane, and the United States Supreme Court has ruled that carbon dioxide is a pollutant subject to regulation by the EPA. In addition, there have been international efforts seeking legally binding reductions in emissions of GHGs.
We believe it is likely that future governmental legislation and/or regulation on the federal, state and regional levels, may require us either to limit GHG emissions associated with our operations, pay additional taxes or to purchase allowances for such emissions. These legislative and/or regulatory initiatives could make some of our activities uneconomic to maintain or operate. Further, we may not be able to pass on the higher costs to our customers or recover all costs related to complying with GHG regulatory requirements. Our future results of operations, financial position or cash flows could be affected adversely if such costs are not recovered or otherwise passed on to our customers. However, we cannot predict precisely what form these future regulations will take, the stringency of the regulations or when they may become effective.
Our operations are subject to federal and state laws and regulations relating to the protection of the environment, which may expose us to significant costs and liabilities. Increased litigation challenging oil and gas development and changes to laws, regulations and policies could impact adversely our business.
The risk of incurring substantial environmental costs and liabilities is inherent in our business. Our operations are subject to extensive federal, state and local laws and regulations governing the discharge of materials into, or otherwise relating to the protection of, the environment. Examples of these laws include:
•the Clean Air Act and analogous state laws that impose obligations related to air emissions;
•the Clean Water Act and analogous state laws that regulate discharge of wastewater from our facilities to state and federal waters;
•the federal Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) and analogous state laws that regulate the cleanup of hazardous substances that may have been released at properties currently or previously owned or operated by us or locations to which we have sent waste for disposal; and
•the federal Resource Conservation and Recovery Act and analogous state laws that impose requirements for the handling and discharge of solid and hazardous waste from our facilities.
Various federal and state governmental authorities, including the EPA, have the power to enforce compliance with these laws and regulations and the permits issued under them. Violators are subject to administrative, civil and criminal penalties, including civil fines, injunctions or both. Joint and several, strict liability may be incurred without regard to fault under the CERCLA, Resource Conservation and Recovery Act and analogous state laws for the remediation of contaminated areas.
There is an inherent risk of incurring environmental costs and liabilities in our business due to our handling of the products we gather, transport, process and store, air emissions related to our operations, past industry operations and waste disposal practices, some of which may be material. Private parties, including the owners of properties through which our pipeline systems pass, may have the right to pursue legal actions to enforce compliance as well as to seek damages for noncompliance with environmental laws and regulations or for personal injury or property damage arising from our operations. Some sites we operate are located near current or former third-party hydrocarbon storage and processing operations, and there is a risk that contamination has migrated from those sites to ours. In addition, increasingly strict laws, regulations and enforcement policies could increase significantly our compliance costs and the cost of any remediation that may become necessary, some of which may be material. Additional information is included under Item 1, Business, under “Regulatory, Environmental and Safety Matters” and in Note N of the Notes to Consolidated Financial Statements in this Annual Report.
Increased litigation challenging oil and gas development, as well as changes to laws, regulations and policies could impact our business. These actions could, among other things, impact our customers’ activities, our existing permits and our ability to obtain permits for new development projects, which could affect adversely our business, financial position, or results of operations.
Our insurance may not cover all environmental risks and has limits on coverage in the event an environmental claim is made against us. Our business may be affected adversely by increased costs due to stricter pollution-control requirements or liabilities resulting from noncompliance with required operating or other regulatory permits. New or revised environmental
regulations might also affect adversely our products and activities, and federal and state agencies could impose additional safety requirements, all of which could affect adversely our profitability.
RISK FACTORS RELATED TO FINANCING OUR BUSINESS
Changes in interest rates could affect adversely our business.
The United States government has issued warnings that energy assets, specificallyWe use both fixed and variable rate debt, and we are exposed to market risk due to the nation’s pipeline infrastructure, may be future targets of terrorist organizations. These developments may subject our operations to increased risks. Any future terrorist attack that may target our facilities, those of our customers and, in some cases, those of other pipelines, could have a material adverse effectfloating interest rates on our business.short-term borrowings. Our results of operations, cash flows and financial position could be affected adversely by significant fluctuations in interest rates from current levels.
In July 2017, the head of the United Kingdom Financial Conduct Authority announced the desire to phase out the use of LIBOR by the end of 2021. However, in November 2020, the administrator of LIBOR, the ICE Benchmark Administration, announced its intention to continue publications of all U.S. dollar LIBOR tenors through June 2023, with the exception of one-week and two-month tenors which will cease at the end of 2021. The U.S. Federal Reserve, in conjunction with the Alternative Reference Rates Committee, a steering committee composed of large US financial institutions, is considering replacing U.S. dollar LIBOR with the Secured Overnight Financing Rate (SOFR), a new index supported by short-term Treasury repurchase agreements. Although there have been some issuances utilizing SOFR, it is unknown whether this alternative reference rate will attain market acceptance as a replacement for LIBOR.
Our $2.5 Billion Credit Agreement includes provisions that grant the administrative agent broad discretion to establish a replacement rate for LIBOR, if necessary, which could increase our short-term borrowing costs for amounts issued under this facility.
Any reduction in our credit ratings could affect materially and adversely our business, financial condition, liquidity and results of operations.operations, financial position and cash flows.
Our long-term debt and our commercial paper program havehas been assigned an investment-grade credit rating of “Baa3” and Prime-3, respectively,“Baa3” by Moody’s and “BBB”“BBB” by both S&P and Fitch. Our commercial paper program has been assigned an investment-grade credit rating of Prime-3, A-2 respectively,and F-2 by Moody’s, S&P.&P and Fitch, respectively. We cannot provide assurance that any of our current ratings will remain in effect for any given period of time or that a rating will not be lowered or withdrawn entirely by athese credit rating agency if, in its judgment, circumstances in the future so warrant. Specifically, if Moody’s or S&Pagencies. If these agencies were to downgrade our long-term debt or our commercial paper rating, particularly below investment grade, our borrowing costs wouldcould increase, which would affect adversely our financial results, and our potential pool of investors and funding sources could decrease. Ratings from creditthese agencies are not recommendations to buy, sell or hold our securities. Each rating should be evaluated independently of any other rating.
Our indebtedness and guarantee obligations could impair our financial condition and our ability to fulfill our obligations.
As of December 31, 2020, we had total indebtedness of $14.4 billion. Our indebtedness and guarantee obligations could have significant consequences. For example, they could:
•make it more difficult for us to satisfy our obligations with respect to senior notes and other indebtedness due to the increased debt-service obligations, which could, in turn, result in an event of default on such other indebtedness or the senior notes;
•impair our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions or general business purposes;
•diminish our ability to withstand a downturn in our business or the economy;
•require us to dedicate a substantial portion of our cash flows from operations to debt-service payments, reducing the availability of cash for working capital, capital expenditures, acquisitions, dividends or general corporate purposes;
•limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; and
•place us at a competitive disadvantage compared with our competitors that have proportionately less debt and fewer guarantee obligations.
We are not prohibited under the indentures governing the senior notes from incurring additional indebtedness, but our debt agreements do subject us to certain operational limitations summarized in the next paragraph. If we incur significant additional indebtedness, it could worsen the negative consequences mentioned above and could affect adversely our ability to repay our other indebtedness.
Our $2.5 Billion Credit Agreement contains provisions that restrict our ability to finance future operations or capital needs or to expand or pursue our business activities. For example, our $2.5 Billion Credit Agreement contains provisions that, among other things, limit our ability to make loans or investments, make material changes to the nature of our business, merge, consolidate or engage in asset sales, grant liens or make negative pledges. It also requires us to maintain certain financial ratios, which limit the amount of additional indebtedness we can incur, as described in the “Liquidity and Capital Resources” section of Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in this Annual Report. These restrictions could result in higher costs of borrowing and impair our ability to generate additional cash. Future financing agreements we may enter into may contain similar or more restrictive covenants.
If we are unable to meet our debt-service obligations or comply with financial covenants, we could be forced to restructure or refinance our indebtedness, seek additional equity capital or sell assets. We may be unable to obtain financing or sell assets on satisfactory terms, or at all.
An event of default may require us to offer to repurchase certain of our and ONEOK Partners’ senior notes or may impair our ability to access capital.
The indentures governing certain of our and ONEOK Partners’ senior notes include an event of default upon the acceleration of other indebtedness of $15 million or more for certain of our senior notes or $100 million or more for certain of our and ONEOK Partners’ senior notes. Such events of default would entitle the trustee or the holders of 25% in aggregate principal amount of our and ONEOK Partners’ outstanding senior notes to declare those senior notes immediately due and payable in full. We may not have sufficient cash on hand to repurchase and repay any accelerated senior notes, which may cause us to borrow money under our credit facility or seek alternative financing sources to finance the repurchases and repayment. We could also face difficulties accessing capital or our borrowing costs could increase, impacting our ability to obtain financing for acquisitions or capital expenditures, to refinance indebtedness and to fulfill our debt obligations.
The right to receive payments on our outstanding debt securities and subsidiary guarantees is unsecured and will be effectively subordinated to any future secured indebtedness as well as to any existing and future indebtedness of our subsidiaries that do not guarantee the senior notes.
Although ONEOK Partners and the Intermediate Partnership have guaranteed our debt securities, the guarantees are subject to release under certain circumstances, and we have subsidiaries that are not guarantors. In those cases, the debt securities effectively are subordinated to the claims of all creditors, including trade creditors and tort claimants, of our subsidiaries that are not guarantors. In the event of the insolvency, bankruptcy, liquidation, reorganization, dissolution or winding up of the business of a subsidiary that is not a guarantor, creditors of that subsidiary would generally have the right to be paid in full before any distribution is made to us or the holders of the debt securities.
A court may use fraudulent conveyance considerations to avoid or subordinate the cross guarantees of our and ONEOK Partners’ indebtedness.
ONEOK, ONEOK Partners and the Intermediate Partnership have cross guarantees in place for our and ONEOK Partners’ indebtedness. A court may use fraudulent conveyance laws to subordinate or avoid the cross guarantees of certain of our and ONEOK Partners’ indebtedness. It is also possible that under certain circumstances, a court could avoid or subordinate the guarantor’s guarantee of our and ONEOK Partners’ indebtedness in favor of the guarantor’s other debts or liabilities to the extent that the court determined either of the following were true at the time the guarantor issued the guarantee:
•the guarantor incurred the guarantee with the intent to hinder, delay or defraud any of its present or future creditors or the guarantor contemplated insolvency with a design to favor one or more creditors to the total or partial exclusion of others; or
•the guarantor did not receive fair consideration or reasonable equivalent value for issuing the guarantee and, at the time it issued the guarantee, the guarantor:
– was insolvent or rendered insolvent by reason of the issuance of the guarantee;
– was engaged or about to engage in a business or transaction for which its remaining assets constituted unreasonably small capital; or
– intended to incur, or believed that it would incur, debts beyond its ability to pay such debts as they matured.
The measure of insolvency for purposes of the foregoing will vary depending upon the law of the relevant jurisdiction. Generally, however, an entity would be considered insolvent for purposes of the foregoing if:
•the sum of its debts, including contingent liabilities, were greater than the fair saleable value of all of its assets at a fair valuation;
•the present fair saleable value of its assets was less than the amount that would be required to pay its probable liability on its existing debts, including contingent liabilities, as they become absolute and mature; or
•it could not pay its debts as they become due.
Among other things, a legal challenge of the cross guarantees of our and ONEOK Partners’ indebtedness on fraudulent conveyance grounds may focus on the benefits, if any, realized by the guarantor as a result of our and ONEOK Partners’ issuance of such debt. To the extent the guarantor’s guarantee of our and ONEOK Partners’ indebtedness is avoided as a result of fraudulent conveyance or held unenforceable for any other reason, the holders of such debt would cease to have any claim in respect of the guarantee.
GENERAL RISK FACTORS
Holders of our common stock may not receive dividends in the amount identified in guidance, or any dividends at all.
We may not have sufficient cash each quarter to pay dividends or maintain current or expected levels of dividends. The actual amount of cash we pay in the form of dividends may fluctuate from quarter to quarter and will depend on various factors, some of which are beyond our control, including our working capital needs, our ability to borrow, the restrictions contained in our indentures and credit facility, our debt service requirements and the cost of acquisitions, if any. A failure either to pay dividends or to pay dividends at expected levels could result in a loss of investor confidence, reputational damage and a decrease in the value of our stock price.
Our operating cash flows are derived partially from cash distributions we receive from our unconsolidated affiliates.
Our operating cash flows are derived partially from cash distributions we receive from our unconsolidated affiliates, as discussed in Note M of the Notes to Consolidated Financial Statements. The amount of cash that our unconsolidated affiliates can distribute principally depends upon the amount of cash flows these affiliates generate from their respective operations, which may fluctuate from quarter to quarter. We do not have any direct control over the cash distribution policies of our unconsolidated affiliates. This lack of control may contribute to us not having sufficient available cash each quarter to continue paying dividends at the current levels.
Additionally, the amount of cash that we have available for cash dividends depends primarily upon our cash flows, including working capital borrowings, and is not solely a function of profitability, which will be affected by noncash items such as depreciation, amortization and provisions for asset impairments. As a result, we may be able to pay cash dividends during periods when we record losses and may not be able to pay cash dividends during periods when we record net income.
We are exposed to the credit risk of our customers or counterparties, and our credit riskcredit-risk management may not be adequate to protect against such risk.
We are subject to the risk of loss resulting from nonpayment and/or nonperformance by our customers and counterparties. Our customers or counterparties may experience rapid deterioration of their financial condition as a result of changing market conditions, commodity prices or financial difficulties that could impact their creditworthiness or ability to pay us for our services. We assess the creditworthiness of our customers and counterparties and obtain collateral or contractual terms as we deem appropriate. We cannot, however, predict to what extent our business may be impacted by deteriorating market or financial conditions, including possible declines in our customers’ and counterparties’ creditworthiness. Our customers and counterparties may not perform or adhere to our existing or future contractual arrangements. To the extent our customers and counterparties are in financial distress or commence bankruptcy proceedings, contracts with them may be subject to renegotiation or rejection under applicable provisions of the United States Bankruptcy Code. If weour risk-management policies and procedures fail to assess adequately the creditworthiness of existing or future customers and counterparties, any material nonpayment or nonperformance by our customers and counterparties due to inability or unwillingness to perform or adhere to contractual arrangements could have a
material adverse impact onaffect adversely our business, results of operations, financial conditionposition, cash flows and ability to pay cash dividends to our shareholders.
Our primaryWe are connected to market areas are located in the Mid-Continent, Rocky Mountain, Permian Basin, Midwest markets, including Chicago, Illinois and Gulf Coast regions of the U.S. Our counterparties are primarily major integrated and independent exploration and production, pipeline, marketing and petrochemical companies.companies and natural gas and electric utilities. Therefore, our counterparties may be similarly affected by changes in economic, regulatory or other factors that may affect our overall credit risk.
A shortage of skilled labor may make it difficult for us to maintain labor productivity and competitive costs.
Our established risk-management policiesoperations require skilled and procedures may not be effective, and employees may violate our risk-management policies.
We have developed and implementedexperienced workers with proficiency in multiple tasks. In recent years, a comprehensive setshortage of policies and procedures that involve both our senior management and our Audit Committee to assist usworkers trained in managing risksvarious skills associated with among other things, the marketing, tradingmidstream energy business has, at times, caused us to conduct certain operations without full staff, thus hiring outside resources, which may decrease productivity and risk-management activities associatedincrease costs. This shortage of trained workers is the result of experienced workers reaching retirement age and increased competition for workers in certain areas, combined with our business segments. Our risk-management policies and procedures are intended to align strategies, processes, people, information technology and business knowledge so that risk is managed throughout the organization. As conditions change and become more complex, current risk measures may fail to assess adequately the relevant risk due to changes in the market and the presencechallenges of risks previously unknown to us. Additionally, if employees fail to adhere to our policies and procedures or if our policies and procedures are not effective, potentially because of future conditions or risks outside of our control, we may be exposed to greater risk than we had intended. Ineffective risk-management policies and procedures or violation of risk-management policies and procedures could have an adverse effect on our earnings, financial position or cash flows.
Our businesses are subject to market and credit risks.
We are exposed to market and credit risks in all of our operations. To reduce the impact of commodity price fluctuations, we may use derivative instruments, such as swaps, puts, futures and forwards, to hedge anticipated purchases and sales of natural gas, NGLs, crude oil and firm transportation commitments. Interest-rate swaps are also used to manage interest-rate risk. However, derivative instruments do not eliminate the risks. Specifically, such risks include commodity price changes, market supply shortages, interest-rate changes and counterparty default. The impact of these variables could result in our inability to fulfill contractual obligations, significantly higher energy or fuel costs relative to corresponding sales contracts, or increased interest expense.
We do not hedge fully against commodity price changes, seasonal price differentials, product price differentials or location price differentials. This could result in decreased revenues, increased costs and lower margins, affecting adversely our results of operations.
Certain of our businesses are exposed to market risk and the impact of market fluctuations in natural gas, NGLs and crude oil prices. Market risk refersattracting new, qualified workers to the riskmidstream energy industry. This shortage of lossskilled labor could continue over an extended period. If the shortage of cash flows and future earnings arising from adverse changes in commodity prices. Our primary commodity price exposures arise from:
the value of the commodities sold under POP with fee contracts of which we retain a portion of the sales proceeds;
the price differentials between the individual NGL products with respect to our NGL transportation and fractionation agreements;
the location price differentials in the price of natural gas and NGLs with respect to our natural gas and NGL transportation businesses;
the seasonal price differentials in natural gas and NGLs related to our storage operations; and
the fuel costs and the value of the retained fuel in-kind in our natural gas pipelines and storage operations.
To manage the risk from market price fluctuations in natural gas, NGLs and crude oil prices, we may use derivative instruments such as swaps, puts, futures, forwards and options. However, we do not hedge fully against commodity price changes, and we therefore retain some exposure to market risk. Accordingly, any adverse changes to commodity prices could result in decreased revenue and increased costs.
Our use of financial instruments and physical-forward transactions to hedge market-risk exposure to commodity price and interest-rate fluctuations may result in reduced income.
We utilize financial instruments and physical-forward transactions to mitigate our exposure to interest rate and commodity price fluctuations. Hedging instruments that are used to reduce our exposure to interest-rate fluctuations could expose us to risk of financial loss where we may contract for fixed-rate swap instruments to hedge variable-rate instruments and the fixed
rate exceeds the variable rate. Hedging arrangements for forecasted sales are used to reduce our exposure to commodity price fluctuations and limit the benefit we would otherwise receive if market prices for natural gas, crude oil and NGLs exceed the stated price in the hedge instrument for these commodities.
Changes in interest ratesexperienced labor continues or worsens, it could affect adversely our business.
We use both fixedlabor productivity and variable rate debt, and we are exposed to market risk due to the floating interest rates on our short-term borrowings. Our results of operations, cash flows and financial position could be affected adversely by significant fluctuations in interest rates from current levels. From time to time we use interest-rate derivatives to hedge interest obligations on specific debt issuances, including anticipated debt issuances.
In July 2017, the head of the United Kingdom Financial Conduct Authority announced the desire to phase out the use of LIBOR by the end of 2021. In addition, the U.S. Federal Reserve, in conjunction with the Alternative Reference Rates Committee, a steering committee comprised of large US financial institutions, is considering replacing U.S. dollar LIBOR with the Secured Overnight Financing Rate (SOFR), a new index supported by short-term Treasury repurchase agreements. Although there have been some issuances utilizing SOFR, it is unknown whether this alternative reference rate will attain market acceptance as a replacement for LIBOR.
Our $2.5 Billion Credit Agreementcosts and our $1.5 Billion Term Loan Agreement include languageability to determine a replacement rate for LIBOR, if necessary. However, if LIBOR ceases to exist, we may need to renegotiate future agreements, if any, extending beyond 2021 that utilize LIBOR as a factorexpand operations in determining the interest rate to replace LIBOR with the new standard thatevent there is established. There is currently no definitive information regarding the future utilization of LIBOR or of any particular replacement rate. As such, the potential effect on us cannot yet be determined.
Demand for natural gas and for certain of our NGL products and services is highly weather sensitive and seasonal.
The demand for natural gas and for certain of our NGL products, such as propane, is weather sensitive and seasonal, with a portion of revenues derived from sales for heating during the winter months. Weather conditions influence directly the volume of, among other things, natural gas and propane delivered to customers. Deviationsan increase in weather from normal levels and the seasonal nature of certain of our segments can create variations in earnings and short-term cash requirements.
Energy efficiency and technological advances may affect the demand for natural gasour services and NGLs and affect adversely our operating results.
More strict local, state and federal energy-conservation measures in the future or technological advances in heating, including installation of improved insulation and the development of more efficient furnaces, energy generation or other devices could affect the demand for natural gas and NGLs and affect adversely our results of operations and cash flows.
A breach of information security, including a cybersecurity attack, or failure of one or more key information technology or operational systems, or those of third parties, may affect adversely our operations, financial results or reputation.
Our businesses are dependent upon our operational systems to process a large amount of data and complex transactions. The various uses of these information technology systems, networks and services include, but are not limited to:
controlling our plants and pipelines with industrial control systems including Supervisory Control and Data Acquisition (SCADA);
collecting and storing customer, employee, investor and other stakeholder information and data;
processing transactions;
summarizing and reporting results of operations;
hosting, processing and sharing confidential and proprietary research, business plans and financial information;
complying with regulatory, legal or tax requirements;
providing data security; and
handling other processing necessary to manage our business.
If any of our systems are damaged, fail to function properly or otherwise become unavailable, we may incur substantial costs to repair or replace them and may experience loss or corruption of critical data and interruptions or delays in our ability to perform critical functions,products, which could affect adversely our business, and results of operations. Ouroperations, financial results could also be affected adversely if an employee causes our operational systems to fail, either as a result of inadvertent error or by deliberately tampering with or manipulating our operational systems. In addition, dependence upon automated systems mayposition and cash flows.
further increase the risk that operational system flaws, employee tampering or manipulation of those systems will result in losses that are difficult to detect.
Due to increased technology advances, we have become more reliant on technology to help increase efficiency in our businesses. We use software to help manage and operate our businesses, and this may subject us to increased risks. In recent years, there has been a rise in the number of cyberattacks on companies’ network and information systems by both state-sponsored and criminal organizations, and as a result, the risks associated with such an event continue to increase. A significant failure, compromise, breach or interruption in our systems could result in a disruption of our operations, physical damages, customer dissatisfaction, damage to our reputation and a loss of customers or revenues. If any such failure, interruption or similar event results in the improper disclosure of information maintained in our information systems and networks or those of our vendors, including personnel, customer and vendor information, we could also be subject to liability under relevant contractual obligations and laws and regulations protecting personal data and privacy. Efforts by us and our vendors to develop, implement and maintain security measures may not be successful in preventing these events from occurring, and any network and information systems-related events could require us to expend significant resources to remedy such event. Cybersecurity, physical security and the continued development and enhancement of our controls, processes and practices designed to protect our enterprise, information systems and data from attack, damage or unauthorized access and to identify and appropriately report cyberattacks, remain a priority for us. Although we believe that we have robust information security procedures and other safeguards in place, as cyberthreats continue to evolve, we may be required to expend additional resources to continue to enhance our information security measures and/or to investigate and remediate information security vulnerabilities.
Cyberattacks against us or others in our industry could result in additional regulations. Current efforts by the federal government, such as the Improving Critical Infrastructure Cybersecurity executive order, and any potential future regulations could lead to increased regulatory compliance costs, insurance coverage cost or capital expenditures. We cannot predict the potential impact to our business or the energy industry resulting from additional regulations.
If we fail to maintain an effective system of internal controls, we may not be able to report accurately our financial results or prevent fraud. As a result, current and potential holders of our equity and debt securities could lose confidence in our financial reporting, which would harm our business and cost of capital.
Effective internal controls are necessary for us to provide reliable financial reports, prevent fraud and operate successfully as a public company. We cannot be certain that our efforts to maintain our internal controls will be successful, that we will be able to maintain adequate controls over our financial processes and reporting in the future or that we will be able to continue to comply with our obligations under Section 404 of the Sarbanes-Oxley Act of 2002. Any failure to maintain effective internal controls, or difficulties encountered in implementing or improving our internal controls, could harm our operating results or cause us to fail to meet our reporting obligations. Ineffective internal controls could also cause investors to lose confidence in our reported financial information, which would likely have a negative effect on the trading price of our equity interests.
Our employees or directors may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements.
As with all companies, we are exposed to the risk of employee fraud or other misconduct. Our Board of Directors has adopted a code of business conduct and ethics that applies to our directors, officers (including our principal executive and financial officers, principal accounting officer, controllers and other persons performing similar functions) and all other employees. We require all directors, officers and employees to adhere to our code of business conduct and ethics in addressing the legal and ethical issues encountered in conducting their work for our company. Our code of business conduct and ethics requires, among other things, that our directors, officers and employees avoid conflicts of interest, comply with all applicable laws and other legal requirements, conduct business in an honest and ethical manner and otherwise act with integrity and in our company’s best interest. All directors, officers and employees are required to report any conduct that they believe to be an actual or apparent violation of our code of business conduct and ethics. However, it is not always possible to identify and deter misconduct, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to comply with such laws or regulations. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a material and adverse effect onaffect adversely our reputation, business, financial condition, cash flows and results of operations.
Pipeline safety laws and regulations may impose significant costs and liabilities.
Pipeline safety legislation that was signed into law in 2012, the 2011 Pipeline Safety Act, directed the Secretary of Transportation to promulgate new safety regulations for natural gas and hazardous liquids pipelines, including expanded integrity management requirements, automatic or remote-controlled valve use, excess flow valve use, leak detection system installation, testing to confirm the material strength of certain pipelines and operator verification of records confirming the maximum allowable pressure of certain gas transmission pipelines. The 2011 Pipeline Safety Act also increased the maximum penalty for violation of pipeline safety regulations from $0.1 million to $0.2 million per violation per day and also from $1 million to $2 million for a related series of violations.
The 2011 Pipeline Safety Act, the Protecting our Infrastructure of Pipelines and Enhancing Safety Act or rules implementing such acts could cause us to incur capital and operating expenditures for pipeline replacements or repairs, additional monitoring equipment or more frequent inspections or testing of our pipeline facilities, preventive or mitigating measures and other tasks that could result in higher operating costs or capital expenditures as necessary to comply with such standards, which costs could be significant.
See further discussion in the “Regulatory, Environmental and Safety Matters” section.
Compliance with environmental regulations that we are subject to may be difficult and costly.
We are subject to a variety of historical preservation and environmental laws and/or regulations that affect many aspects of our present and future operations. Regulated activities include, but are not limited to, those involving air emissions, storm water and wastewater discharges, handling and disposal of solid and hazardous wastes, wetlands and waterways preservation, cultural 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 and/or interruptions in our operations that could be material to our results of operations. For example, if a leak or spill of hazardous substances or petroleum products occurs from our 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 clean-up costs, which could affect materially our results of operations and cash flows. In addition, emissions controls and/or other regulatory or permitting mandates under the federal Clean Air Act and other similar federal and state laws could require unexpected capital expenditures at our facilities. We cannot assure that existing environmental statutes and regulations will not be revised or that new regulations will not be adopted or become applicable to us. Revised or additional regulations that result in increased compliance costs or additional operating restrictions, particularly if those costs are not fully recoverable from customers, could have a material adverse effect on our business, financial condition, cash flows and results of operations.
Our operations are subject to federal and state laws and regulations relating to the protection of the environment, which may expose us to significant costs and liabilities.
The risk of incurring substantial environmental costs and liabilities is inherent in our business. Our operations are subject to extensive federal, state and local laws and regulations governing the discharge of materials into, or otherwise relating to the protection of, the environment. Examples of these laws include:
the Clean Air Act and analogous state laws that impose obligations related to air emissions;
the Clean Water Act and analogous state laws that regulate discharge of wastewater from our facilities to state and federal waters;
the federal Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) and analogous state laws that regulate the cleanup of hazardous substances that may have been released at properties currently or previously owned or operated by us or locations to which we have sent waste for disposal; and
the federal Resource Conservation and Recovery Act and analogous state laws that impose requirements for the handling and discharge of solid and hazardous waste from our facilities.
Various federal and state governmental authorities, including the EPA, have the power to enforce compliance with these laws and regulations and the permits issued under them. Violators are subject to administrative, civil and criminal penalties, including civil fines, injunctions or both. Joint and several, strict liability may be incurred without regard to fault under the CERCLA, Resource Conservation and Recovery Act and analogous state laws for the remediation of contaminated areas.
There is an inherent risk of incurring environmental costs and liabilities in our business due to our handling of the products we gather, transport, process and store, air emissions related to our operations, past industry operations and waste disposal
practices, some of which may be material. Private parties, including the owners of properties through which our pipeline systems pass, may have the right to pursue legal actions to enforce compliance as well as to seek damages for noncompliance with environmental laws and regulations or for personal injury or property damage arising from our operations. Some sites we operate are located near current or former third-party hydrocarbon storage and processing operations, and there is a risk that contamination has migrated from those sites to ours. In addition, increasingly strict laws, regulations and enforcement policies could increase significantly our compliance costs and the cost of any remediation that may become necessary, some of which may be material. Additional information is included under Item 1, Business, under “Regulatory, Environmental and Safety Matters” and in Note N of the Notes to Consolidated Financial Statements in this Annual Report.
Our insurance may not cover all environmental risks and costs or may not provide sufficient coverage in the event an environmental claim is made against us. Our business may be affected materially and adversely by increased costs due to stricter pollution-control requirements or liabilities resulting from noncompliance with required operating or other regulatory permits. New or revised environmental regulations might also affect materially and adversely our products and activities, and federal and state agencies could impose additional safety requirements, all of which could affect materially our profitability.
We may face significant costs to comply with the regulation of GHG emissions.
GHG emissions originate primarily from combustion engine exhaust, heater exhaust and fugitive methane gas emissions. International, federal, regional and/or state legislative and/or regulatory initiatives may attempt to control or limit GHG emissions, including initiatives directed at issues associated with climate change. Various federal and state legislative proposals have been introduced to regulate the emission of GHGs, particularly carbon dioxide and methane, and the United States Supreme Court has ruled that carbon dioxide is a pollutant subject to regulation by the EPA. In addition, there have been international efforts seeking legally binding reductions in emissions of GHGs.
We believe it is likely that future governmental legislation and/or regulation may require us either to limit GHG emissions associated with our operations or to purchase allowances for such emissions. However, we cannot predict precisely what form these future regulations will take, the stringency of the regulations or when they will become effective. Several legislative bills have been introduced in the United States Congress that would require carbon dioxide emission reductions. Previously considered proposals have included, among other things, limitations on the amount of GHGs that can be emitted (so called “caps”) together with systems of permitted emissions allowances. These proposals could require us to reduce emissions, even though the technology is not currently available for efficient reduction, or to purchase allowances for such emissions. Emissions also could be taxed independently of limits.
In addition to activities on the federal level, state and regional initiatives could also lead to the regulation of GHG emissions sooner than and/or independent of federal regulation. These regulations could be more stringent than any federal legislation that may be adopted.
Future legislation and/or regulation designed to reduce GHG emissions could make some of our activities uneconomic to maintain or operate. Further, we may not be able to pass on the higher costs to our customers or recover all costs related to complying with GHG regulatory requirements. Our future results of operations, cash flows or financial condition could be affected adversely if such costs are not recovered through regulated rates or otherwise passed on to our customers.
We continue to monitor legislative and regulatory developments in this area and otherwise take efforts to limit GHG emissions from our facilities, including methane. Although the regulation of GHG emissions may have a material impact on our operations and rates, we believe it is premature to attempt to quantify the potential costs of the impacts.
We may be subject to physical and financial risks associated with climate change.
The threat of global climate change may create physical and financial risks to our business. Our customers’ energy needs vary with weather conditions, primarily temperature and humidity. For residential customers, heating and cooling represent their largest energy use. To the extent weather conditions may be affected by climate change, customers’ energy use could increase or decrease depending on the duration and magnitude of any changes. Increased energy use due to weather changes may require us to invest in more pipelines and other infrastructure to serve increased demand. A decrease in energy use due to weather changes may affect our financial condition, through decreased revenues. Extreme weather conditions in general require more system backup, adding to costs, and can contribute to increased system stresses, including service interruptions. Weather conditions outside of our operating territory could also have an impact on our revenues. Severe weather impacts our operating territories primarily through hurricanes, thunderstorms, tornados and snow or ice storms. To the extent the frequency of extreme weather events increases, this could increase our cost of providing service. We may not be able to pass on the higher costs to our customers or recover all costs related to mitigating these physical risks. To the extent financial markets
view climate change and emissions of GHGs as a financial risk, this could affect negatively our ability to access capital markets or cause us to receive less favorable terms and conditions in future financings. Our business could be affected by the potential for lawsuits against GHG emitters, based on links drawn between GHG emissions and climate change.
Our business is subject to regulatory oversight and potential penalties.
The energy industry historically has been subject to heavy state and federal regulation that extends to many aspects of our businesses and operations, including:
rates, operating terms and conditions of service;
the types of services we may offer our counterparties;
construction of new facilities;
the integrity, safety and security of facilities and operations;
acquisition, extension or abandonment of services or facilities;
reporting and information posting requirements;
maintenance of accounts and records; and
relationships with affiliate companies involved in all aspects of the natural gas and energy businesses.
Compliance with these requirements can be costly and burdensome. Future changes to laws, regulations and policies in these areas may impair our ability to compete for business or to recover costs and may increase the cost and burden of operations. We cannot guarantee that state or federal regulators will authorize any projects or acquisitions that we may propose in the future. Moreover, there can be no guarantee that, if granted, any such authorizations will be made in a timely manner or will be free from potentially burdensome conditions.
Failure to comply with all applicable state or federal statutes, rules and regulations and orders could bring substantial penalties and fines. For example, under the Energy Policy Act of 2005, the FERC has civil penalty authority under the Natural Gas Act to impose penalties for current violations of up to $1 million per day for each violation.
Finally, we cannot give any assurance regarding future state or federal regulations under which we will operate or the effect such regulations could have on our business, financial condition, results of operations and cash flows.
Our regulated pipelines’ transportation rates are subject to review and possible adjustment by federal and state regulators.
Under the Natural Gas Act, which is applicable to interstate natural gas pipelines, and the Interstate Commerce Act, which is applicable to crude oil and natural gas liquids pipelines, our interstate transportation rates, which are regulated by the FERC, must be just and reasonable and not unduly discriminatory.
If we were permitted to raise our tariff rates for a particular pipeline, there might be significant delay between the time the tariff rate increase is approved and the time that the rate increase actually goes into effect. Furthermore, competition from other pipeline systems may prevent us from raising our tariff rates even if regulatory agencies permit us to do so. The regulatory agencies that regulate our systems periodically implement new rules, regulations and terms and conditions of services subject to their jurisdiction. New initiatives or orders may affect adversely the rates charged for our services.
Finally, shippers may protest our pipeline tariff filings, and the FERC and or state regulatory agency may investigate tariff rates. Further, the FERC may order refunds of amounts collected under newly filed rates that are determined by the FERC to be in excess of a just and reasonable level. In addition, shippers may challenge by complaint the lawfulness of tariff rates that have become final and effective. The FERC and/or state regulatory agencies also may investigate tariff rates absent shipper complaint. Any finding that approved rates exceed a just and reasonable level on the natural gas pipelines would take effect prospectively. In a complaint proceeding challenging natural gas liquids pipeline rates, if the FERC determines existing rates exceed a just and reasonable level, it could require the payment of reparations to complaining shippers for up to two years prior to the complaint. Any such action by the FERC or a comparable action by a state regulatory agency could affect adversely our pipeline businesses’ ability to charge rates that would cover future increases in costs, or even to continue to collect rates that cover current costs, and provide for a reasonable return. We can provide no assurance that our pipeline systems will be able to recover all of their costs through existing or future rates.
We are subject to comprehensive energy regulation by governmental agencies, and the recovery of our costs are dependent on regulatory action.
Federal, state and local agencies have jurisdiction over many of our activities, including regulation by the FERC of our interstate pipeline assets. The profitability of our regulated operations is dependent on our ability to pass through costs related to providing energy and other commodities to our customers by filing periodic rate cases. The regulatory environment applicable to our regulated businesses could impair our ability to recover costs historically absorbed by our customers.
We are unable to predict the impact that the future regulatory activities of these agencies will have on our operating results. Changes in regulations or the imposition of additional regulations could have an adverse impact on our business, financial condition, cash flows and results of operations.
Our regulated pipeline companies have recorded certain assets that may not be recoverable from our customers.
Accounting policies for FERC-regulated companies permit certain assets that result from the regulated rate-making process to be recorded on our balance sheet that could not be recorded under GAAP for nonregulated entities. We consider factors such as regulatory changes and the impact of competition to determine the probability of future recovery of these assets. If we determine future recovery is no longer probable, we would be required to write off the regulatory assets at that time.
A shortage of skilled labor may make it difficult for us to maintain labor productivity and competitive costs, which could affect operations and cash flows available for dividends to our shareholders.
Our operations require skilled and experienced workers with proficiency in multiple tasks. In recent years, a shortage of workers trained in various skills associated with the midstream energy business has caused us to conduct certain operations without full staff, thus hiring outside resources, which may decrease productivity and increase costs. This shortage of trained workers is the result of experienced workers reaching retirement age and increased competition for workers in certain areas, combined with the challenges of attracting new, qualified workers to the midstream energy industry. This shortage of skilled labor could continue over an extended period. If the shortage of experienced labor continues or worsens, it could have an adverse impact on our labor productivity and costs and our ability to expand production in the event there is an increase in the demand for our products and services, which could affect adversely our operations and cash flows available for dividends to our shareholders.
We are subject to strict regulations at many of our facilities regarding employee safety, and failure to comply with these regulations could affect adversely our business, financial position, results of operations and cash flows.
The workplaces associated with our facilities are subject to the requirements of OSHA and comparable state statutes that regulate the protection of the health and safety of workers. The failure to comply with OSHA requirements or general industry standards, including keeping adequate records or monitoring occupational exposure to regulated substances, could expose us to civil or criminal liability, enforcement actions, and regulatory fines and penalties and could have a material adverse effect on our business, financial position, results of operations and cash flows.
Measurement adjustments on our pipeline system may be impacted materially by changes in estimation, type of commodity and other factors.
Natural gas and natural gas liquids measurement adjustments occur as part of the normal operating conditions associated with our assets. The quantification and resolution of measurement adjustments are complicated by several factors including: (i) the significant quantities (i.e., thousands) of measurement equipment that we use throughout our natural gas and natural gas liquids systems, primarily around our gathering and processing assets; (ii) varying qualities of natural gas in the streams gathered and processed through our systems and the mixed nature of NGLs gathered and fractionated; and (iii) variances in measurement that are inherent in metering technologies. Each of these factors may contribute to measurement adjustments that can occur on our systems, which could negatively affect our business, financial position, results of operations and cash flows.
Many of our pipeline and storage assets have been in service for several decades.
Many of our pipeline and storage assets are designed as long-lived assets. Over time the age of these assets could result in increased maintenance or remediation expenditures and an increased risk of product releases and associated costs and liabilities. Any significant increase in these expenditures, costs or liabilities could affect materially and adversely our results of operations, financial position orand cash flows, as well as our ability to pay cash dividends.flows.
We may be unable to cause our joint ventures to take or not to take certain actions unless some or all of our joint-venture participants agree.
We participate in several joint ventures. Due to the nature of some of these arrangements, each participant in these joint ventures has made substantial investments in the joint venture and, accordingly, has required that the relevant charter documents contain certain features designed to provide each participant with the opportunity to participate in the management of the joint venture and to protect its investment, as well as any other assets that may be substantially dependent on or otherwise affected by the activities of that joint venture. These participation and protective features customarily include a corporate governance structure that requires at least a majority-in-interest vote to authorize many basic activities and requires a greater voting interest (sometimes up to 100 percent) to authorize more significant activities. Examples of these more significant activities are large expenditures or contractual commitments, the construction or acquisition of assets, borrowing money or otherwise raising capital, transactions with affiliates of a joint-venture participant, litigation and transactions not in the ordinary course of business, among others. Thus, without the concurrence of joint-venture participants with enough voting interests, we may be unable to cause any of our joint ventures to take or not to take certain actions, even though those actions may be in the best interest of us or the particular joint venture.
Moreover, any joint-venture owner generally may sell, transfer or otherwise modify its ownership interest in a joint venture, whether in a transaction involving third parties or the other joint-venture owners. Any such transaction could result in us being required to partner with different or additional parties.
We do not operate all of our joint-venture assets nor do we employ directly all of the persons responsible for providing us with administrative, operating and management services. This reliance on others to operate joint-venture assets and to provide other services could affect adversely our business and operating results.
We rely on others to provide administrative, operating and management services for certain of our joint-venture assets. We have a limited ability to control the operations and the associated costs of such operations. The success of these operations depends on a number of factors that are outside our control, including the competence and financial resources of the provider. Some or all of these services may be outsourced to third parties, and a failure to perform by these third-party providers could lead to delays in or interruptions of these services. We may have to contract elsewhere for these services, which may cost more than we are currently paying. In addition, we may not be able to obtain the same level or kind of service or retain or receive the services in a timely manner, which may impact our ability to perform under our contracts and negatively affect our business and operating results. Our reliance on others to operate joint-venture assets, together with our limited ability to control certain costs, could harm our business and results of operations.
An impairment of goodwill, long-lived assets, including intangible assets, and equity-method investments could reduce our earnings.
Goodwill is recorded when the purchase price of a business exceeds the fair market value of the tangible and separately measurable intangible net assets. GAAP requires us to test goodwill for impairment on an annual basis or when events or circumstances occur indicating that goodwill might be impaired. Long-lived assets, including intangible assets with finite useful lives, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. For the investments we account for under the equity method, the impairment test 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. For example, if a low commodity price environment persisted for a prolonged period, it could result in lower volumes delivered to our systems and impairments of our assets or equity-method investments. If we determine that an impairment is indicated, we would be required to take an immediate noncash charge to earnings with a correlative effect on equity and balance sheet leverage as measured by consolidated debt to total capitalization.
Our indebtednessFor further discussion of impairments of goodwill, long-lived assets and guarantee obligations could impairequity-method investments, see Notes A, E, D and M, respectively, of the Notes to Consolidated Financial Statements in this Annual Report.
Acquisitions that appear to be accretive may nevertheless reduce our financial conditioncash from operations on a per-share basis.
Any acquisition involves potential risks that may include, among other things:
•inaccurate assumptions about volumes, revenues and our abilitycosts, including potential synergies;
•an inability to fulfill our obligations.integrate successfully the businesses we acquire;
As of December 31, 2018, we had total indebtedness of $9.4 billion. Our indebtedness and guarantee obligations could have significant consequences. For example, they could:
make it more difficult for us to satisfy our obligations with respect to senior notes and other indebtedness due to the increased debt-service obligations, which could, in turn, result in an event of default on such other indebtedness or the senior notes;
impair our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions or general business purposes;
diminish our ability to withstand a downturn•decrease in our business or the economy;
require us to dedicate a substantial portion of our cash flows from operations to debt-service payments, reducing the availability of cash for working capital, capital expenditures, acquisitions, dividends or general corporate purposes;
limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; and
place us at a competitive disadvantage compared with our competitors that have proportionately less debt and fewer guarantee obligations.
We are not prohibited under the indentures governing the senior notes from incurring additional indebtedness, but our debt agreements do subject us to certain operational limitations summarized in the next paragraph. If we incur significant additional indebtedness, it could worsen the negative consequences mentioned above and could affect adversely our ability to repay our other indebtedness.
Our $2.5 Billion Credit Agreement and $1.5 Billion Term Loan Agreement contain provisions that restrict our ability to finance future operations or capital needs or to expand or pursue our business activities. For example, certain of these agreements contain provisions that, among other things, limit our ability to make loans or investments, make material changes to the nature of our business, merge, consolidate or engage in asset sales, grant liens or make negative pledges. Certain agreements also require us to maintain certain financial ratios, which limit the amount of additional indebtedness we can incur, as described in the “Liquidity and Capital Resources” section of Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operation. These restrictions could result in higher costs of borrowing and impair our ability to generate additional cash. Future financing agreements we may enter into may contain similar or more restrictive covenants.
If we are unable to meet our debt-service obligations, we could be forced to restructure or refinance our indebtedness, seek additional equity capital or sell assets. We may be unable to obtain financing or sell assets on satisfactory terms, or at all.
The right to receive payments on our outstanding debt securities and subsidiary guarantees is unsecured and will be effectively subordinated to our existing and future secured indebtedness as well as to any existing and future indebtedness of our subsidiaries that do not guarantee the senior notes.
Our debt securities are effectively subordinated to claims of our secured creditors, and the guarantees are effectively subordinated to the claims of our secured creditors as well as the secured creditors of our subsidiary guarantors. Although many of our operating subsidiaries have guaranteed such debt securities, the guarantees are subject to release under certain circumstances, and we may have subsidiaries that are not guarantors. In that case, the debt securities effectively would be subordinated to the claims of all creditors, including trade creditors and tort claimants, of our subsidiaries that are not guarantors. In the event of the insolvency, bankruptcy, liquidation, reorganization, dissolution or winding up of the business of a subsidiary that is not a guarantor, creditors of that subsidiary would generally have the right to be paid in full before any distribution is made to us or the holders of the debt securities.
An event of default may require us to offer to repurchase certain of our and ONEOK Partners’ senior notes or may impair our ability to access capital.
The indentures governing certain of our and ONEOK Partners’ senior notes include an event of default upon the acceleration of other indebtedness of $15 million or more for certain of our senior notes or $100 million or more for certain of our senior notes and ONEOK Partners’ senior notes. Such events of default would entitle the trustee or the holders of 25 percent in aggregate principal amount of our and ONEOK Partners’ outstanding senior notes to declare those senior notes immediately due and payable in full. We may not have sufficient cash on hand to repurchase and repay any accelerated senior notes, which may cause us to borrow money under our credit facility or seek alternative financing sources to finance the repurchases and repayment. We could also face difficulties accessing capital or our borrowing costs could increase, impacting our ability to obtain financing for acquisitions or capital expenditures, to refinance indebtedness and to fulfill our debt obligations.
A court may use fraudulent conveyance considerations to avoid or subordinate the cross guarantees of our and ONEOK Partners’ indebtedness.
Various applicable fraudulent conveyance laws have been enacted for the protection of creditors. ONEOK, ONEOK Partners and the Intermediate Partnership have cross guarantees in place for our and ONEOK Partners’ indebtedness. A court may use fraudulent conveyance laws to subordinate or avoid the cross guarantees of certain of our and ONEOK Partners’ indebtedness. It is also possible that under certain circumstances, a court could hold that the direct obligations of the guarantor could be superior to the obligations under that cross guarantee.
A court could avoid or subordinate the guarantor’s guarantee of our and ONEOK Partners’ indebtedness in favor of the guarantor’s other debts or liabilities to the extent that the court determined either of the following were true at the time the guarantor issued the guarantee:
the guarantor incurred the guarantee with the intent to hinder, delay or defraud any of its present or future creditors or the guarantor contemplated insolvency with a design to favor one or more creditors to the total or partial exclusion of others; or
the guarantor did not receive fair consideration or reasonable equivalent value for issuing the guarantee and, at the time it issued the guarantee, the guarantor:
– was insolvent or rendered insolvent by reason of the issuance of the guarantee;
| |
– | was engaged or about to engage in a business or transaction for which its remaining assets constituted unreasonably small capital; or |
– intended to incur, or believed that it would incur, debts beyond its ability to pay such debts as they matured.
The measure of insolvency for purposes of the foregoing will vary depending upon the law of the relevant jurisdiction. Generally, however, an entity would be considered insolvent for purposes of the foregoing if:
the sum of its debts, including contingent liabilities, were greater than the fair saleable value of all of its assets at a fair valuation;
the present fair saleable value of its assets was less than the amount that would be required to pay its probable liability on its existing debts, including contingent liabilities, as they become absolute and mature; or
it could not pay its debts as they become due.
Among other things, a legal challenge of the cross guarantees of our and ONEOK Partners’ indebtedness on fraudulent conveyance grounds may focus on the benefits, if any, realized by the guarantorliquidity as a result of our and ONEOK Partners’ issuance of such debt. To the extent the guarantor’s guaranteeusing a significant portion of our available cash or borrowing capacity to finance the acquisition;
•a significant increase in our interest expense and/or financial leverage if we incur additional debt to finance the acquisition;
•the assumption of unknown liabilities for which we are not indemnified, our indemnity is inadequate or our insurance policies may exclude from coverage;
•an inability to hire, train or retain qualified personnel to manage and ONEOK Partners’ indebtedness is avoided as a resultoperate the acquired business and assets;
•limitations on rights to indemnity from the seller;
•inaccurate assumptions about the overall costs of fraudulent conveyanceequity or held unenforceable fordebt;
•the diversion of management’s and employees’ attention from other business concerns;
•unforeseen difficulties operating in new product areas or new geographic areas;
•increased regulatory burdens;
•customer or key employee losses at an acquired business; and
•increased regulatory requirements.
If we consummate any future acquisitions, our capitalization and results of operations may change significantly, and investors will not have the opportunity to evaluate the economic, financial and other reason,relevant information that we will consider in determining the holdersapplication of such debt would ceaseour resources to have any claim in respect of the guarantee.future acquisitions.
The cost of providing pension and postretirement health care benefits to eligible employees and qualified retirees is subject to changes in pension fund values and changing demographics and may increase.
We have a defined benefit pension plan for certain employees and former employees hired before January 1, 2005, and postretirement welfare plans that provide postretirement medical and life insurance benefits to certain employees hired prior to 2017 who retire with at least five years of full-time service. The cost of providing these benefits to eligible current and former employees is subject to changes in the market value of our pension and postretirement benefit plan assets, changing demographics, including longer life expectancy of plan participants and their beneficiaries and changes in health care costs. For further discussion of our defined benefit pension plan and postretirement welfare plans, see Note K of the Notes to Consolidated Financial Statements in this Annual Report.
Any sustained declines in equity markets and reductions in bond yields may have a material adverse effect onaffect adversely the value of our pension and postretirement benefit plan assets. In these circumstances, additional cash contributions to our pension plans may be required, which could impactaffect adversely our business, financial condition and liquidity.
TAX RISKS
Federal, stateIf we fail to maintain an effective system of internal controls, we may not be able to report accurately our financial results or prevent fraud. As a result, current and local jurisdictions may challengepotential holders of our tax return positions.
The positions takenequity and debt securities could lose confidence in our federalfinancial reporting.
Effective internal controls are necessary for us to provide reliable financial reports, prevent fraud and state tax return filings require significant judgments, useoperate successfully as a public company. We cannot be certain that our efforts to maintain our internal controls will be successful, that we will be able to maintain adequate controls over our financial processes and reporting in the future or that we will be able to continue to comply with our obligations under Section 404 of estimatesthe Sarbanes-Oxley Act of 2002. Any failure to maintain effective internal controls, or difficulties encountered in implementing or improving our internal controls, could harm our operating results or cause us to fail to meet our reporting obligations. Ineffective internal controls could also cause investors to lose confidence in our reported financial information, which would likely have a negative effect on the trading price of our equity, our access to capital markets and the interpretation and applicationcost of complex tax laws. Significant judgment is also required in assessing the timing and amounts of deductible and taxable items. Despite management’s belief that our tax return positions are fully supportable, certain positions may be successfully challenged by federal, state and local jurisdictions.capital.
Changes in guidance and regulation related to the Tax Cuts and Jobs Act legislation may impact us.
Since the Tax Cuts and Jobs Act was enacted, additional guidance in the form of notices and proposed regulations which interpret various aspects of the legislation have been issued. Additionally, the legislation could be subject to potential amendments and technical corrections. We continue to monitor proposed regulations and other guidance related to the Tax Cuts and Jobs Act and will continue to apply applicable guidance and rule-making as it becomes available. Any future
interpretations, regulations, amendments or corrections could have an adverse impact on our financial condition, results of operations and cash flows.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
A description of our properties is included in Item 1, Business.
ITEM 3. LEGAL PROCEEDINGS
Information about our legal proceedings is included in Note N of the Notes to Consolidated Financial Statements in this Annual Report.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
| |
ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is listed on the NYSE under the trading symbol “OKE.” The corporate name ONEOK is used in newspaper stock listings.
At February 19, 2019,16, 2021, there were 14,22313,844 holders of record of our 411,611,382444,983,595 outstanding shares of common stock.
For information regarding our Employee Stock Award Program and other equity compensation plans, see Note J of the Notes to Consolidated Financial Statements and “Equity Compensation Plan Information” included in Part III, Item 12, Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters, in this Annual Report.
PERFORMANCE GRAPH
The following performance graph compares the performance of our common stock with the S&P 500 Index, the Alerian Midstream Energy Select Index and a ONEOK Peer Group during the period beginning on December 31, 2013,2015, and ending on December 31, 2018.2020.
The graph assumes a $100 investment in our common stock and in each of the indices at the beginning of the period and a reinvestment of dividends paid on such investments throughout the period.
Value of a $100 Investment, Assuming Reinvestment of Distributions/Dividends,
at December 31, 2013,2015, and at the End of Every Year Through December 31, 2018.2020.
|
| | | | | | | | | | | | | | | | | | | | |
| | Cumulative Total Return |
| | Years Ended December 31, |
| | 2014 | | 2015 | | 2016 | | 2017 | | 2018 |
| | | | | | | | | | |
ONEOK, Inc. | | $ | 94.68 |
| | $ | 49.84 |
| | $ | 124.28 |
| | $ | 121.69 |
| | $ | 129.34 |
|
S&P 500 Index | | $ | 113.68 |
| | $ | 115.24 |
| | $ | 129.02 |
| | $ | 157.17 |
| | $ | 150.27 |
|
ONEOK Peer Group (a) | | $ | 122.75 |
| | $ | 74.58 |
| | $ | 97.94 |
| | $ | 90.23 |
| | $ | 75.23 |
|
Alerian Energy Infrastructure Index (b) | | $ | 113.90 |
| | $ | 71.60 |
| | $ | 102.60 |
| | $ | 103.10 |
| | $ | 84.68 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Cumulative Total Return |
| | Years Ended December 31, |
| | 2016 | | 2017 | | 2018 | | 2019 | | 2020 |
| | | | | | | | | | |
ONEOK, Inc. | | $ | 249.37 | | | $ | 244.18 | | | $ | 259.53 | | | $ | 383.51 | | | $ | 217.21 | |
S&P 500 Index | | $ | 111.96 | | | $ | 136.40 | | | $ | 130.42 | | | $ | 171.49 | | | $ | 203.04 | |
ONEOK Peer Group (a) | | $ | 148.02 | | | $ | 138.01 | | | $ | 117.37 | | | $ | 127.36 | | | $ | 90.69 | |
Alerian Midstream Energy Select Index (b) | | $ | 143.55 | | | $ | 144.65 | | | $ | 119.08 | | | $ | 145.69 | | | $ | 111.56 | |
(a) - The ONEOK Peer Group is comprisedcomposed of the following companies: Buckeye Partners, L.P.; DCP Midstream, LP; Enbridge Inc.;Enable Midstream Partners, LP; Energy Transfer LP.;LP; EnLink Midstream, Partners, LP;LLC; Enterprise Products Partners L.P.; Kinder Morgan, Inc.; Magellan Midstream Partners, L.P.; MPLX LP; NuStar Energy L.P.; Plains All American Pipeline, L.P.; Targa Resources Corp.; and The Williams Companies, Inc.
(b) - The Alerian Midstream Energy Select Index measures the composite performance of approximately 4036 North American energy infrastructure companies who are engaged in midstream activities involving energy commodities.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth our selected financial data for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2020 | | 2019 | | 2018 | | 2017 | | 2016 |
| | (Millions of dollars, except per share data) |
Revenues | | $ | 8,542.2 | | | $ | 10,164.4 | | | $ | 12,593.2 | | | $ | 12,173.9 | | | $ | 8,920.9 | |
Net income | | $ | 612.8 | | | $ | 1,278.6 | | | $ | 1,155.0 | | | $ | 593.5 | | | $ | 743.5 | |
Total assets | | $ | 23,078.8 | | | $ | 21,812.1 | | | $ | 18,231.7 | | | $ | 16,845.9 | | | $ | 16,138.8 | |
Long-term debt, including current maturities | | $ | 14,236.1 | | | $ | 12,487.4 | | | $ | 9,381.0 | | | $ | 8,524.3 | | | $ | 8,330.6 | |
EPS - total | | | | | | | | | | |
Basic | | $ | 1.42 | | | $ | 3.09 | | | $ | 2.80 | | | $ | 1.30 | | | $ | 1.67 | |
Diluted | | $ | 1.42 | | | $ | 3.07 | | | $ | 2.78 | | | $ | 1.29 | | | $ | 1.66 | |
Dividends declared per share of common stock | | $ | 3.74 | | | $ | 3.53 | | | $ | 3.245 | | | $ | 2.72 | | | $ | 2.46 | |
|
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
| | (Millions of dollars, except per share data) |
Revenues | | $ | 12,593.2 |
| | $ | 12,173.9 |
| | $ | 8,920.9 |
| | $ | 7,763.2 |
| | $ | 12,195.1 |
|
Net income | | $ | 1,155.0 |
| | $ | 593.5 |
| | $ | 743.5 |
| | $ | 379.2 |
| | $ | 663.1 |
|
Net income attributable to ONEOK | | $ | 1,151.7 |
| | $ | 387.8 |
| | $ | 352.0 |
| | $ | 245.0 |
| | $ | 314.1 |
|
Total assets | | $ | 18,231.7 |
| | $ | 16,845.9 |
| | $ | 16,138.8 |
| | $ | 15,446.1 |
| | $ | 15,261.8 |
|
Long-term debt, including current maturities | | $ | 9,381.0 |
| | $ | 8,524.3 |
| | $ | 8,330.6 |
| | $ | 8,434.2 |
| | $ | 7,160.8 |
|
Earnings per share - total | | | | | | |
| | |
| | |
|
Basic | | $ | 2.80 |
| | $ | 1.30 |
| | $ | 1.67 |
| | $ | 1.17 |
| | $ | 1.50 |
|
Diluted | | $ | 2.78 |
| | $ | 1.29 |
| | $ | 1.66 |
| | $ | 1.16 |
| | $ | 1.49 |
|
Dividends declared per share of common stock | | $ | 3.245 |
| | $ | 2.72 |
| | $ | 2.46 |
| | $ | 2.43 |
| | $ | 2.125 |
|
Changes in commodity prices and sales volumes affect both revenue and cost of sales and fuel, and, therefore, the changes in revenue in the above table are largely offset in cost of sales and fuel.
In 2020, we incurred $644.9 million in noncash impairment charges, which had an adverse impact on our financial results for the year ended December 31, 2020. In 2017, we recorded noncash impairment charges of $20.2 million.
Upon adoption of Topic 606 in January 2018, we determined that certain Natural Gas Gathering and Processing segment POPfee with feePOP contracts and Natural Gas Liquids segment exchange services contracts that include the purchase of commodities are supplier contracts. Therefore, contractualContractual fees in these identified contracts are now recorded as a reduction of the commodity purchase price in cost of sales and fuel. In 2017 and prior periods, these fees were recorded as services revenue. For more information, see Note O in the Notes to the Consolidated Financial Statements.
In the fourth quarter 2017, we recorded a one-time noncash charge to net income through income tax expense of $141.3 million, related to the revaluation of our deferred tax balances and a valuation allowance on certain state net operating loss and tax credit carryforwards resulting from the enactment of the Tax Cuts and Jobs Act. For more information, see Note L in the Notes to the Consolidated Financial Statements.
Also in 2017, we incurred a $20.0 million noncash expense related to our Series E Preferred Stock contribution to the Foundation and operating costs related to the Merger Transaction of $30.0 million.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
We recorded noncash impairment charges of $20.2 million, $264.3 million and $76.4 million in 2017, 2015 and 2014, respectively.
| |
ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion and analysis should be read in conjunction with Part I, Item 1, Business, our audited Consolidated Financial Statements and the Notes to Consolidated Financial Statements in this 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 Annual Report for additional information.
Merger TransactionCOVID-19 - On June 30, 2017,While we completedare still experiencing global and regional economic disruption due primarily to COVID-19, our producers have reversed curtailments that were put in place during the acquisition of allsecond quarter 2020, bringing volumes back to pre-COVID-19 levels as prices significantly improved from second quarter 2020 lows. The full impact of the outstanding common unitscontinued global and regional economic disruption will depend on the unknown duration and severity of ONEOK Partners that we did not already own. PriorCOVID-19, and, among other things, the impact of governmental actions imposed in response to June 30, 2017, weCOVID-19, the pace and scale of economic recovery and corresponding demand for crude oil, and the impacts to commodity prices. We continue to monitor producers’ drilling, completion and production plans, which are increasingly positive as commodity prices have stabilized and improved, and our subsidiaries owned allexpectations for 2021 include the potential for an improving pace of the general partner interest, which included incentive distribution rights,drilling and a portion of the limited partner interest, which together represented a 41.2 percent ownership interest in ONEOK Partners. The earnings of ONEOK Partners that are attributedcompletion activity.
In this challenging market environment, we expect to its units held by the public during the six months ended June 30, 2017, are reported as “Net income attributable to noncontrolling interests” in our Consolidated Statement of Income. Our general partner incentive distribution rights effectively terminated at the closing of the Merger Transaction.
Market Conditions - Volumes increased across our operating regions in our Natural Gas Gatheringmaintain sufficient liquidity and Processing and Natural Gas Liquids segments in 2018, compared with 2017, as a result of improved crude oil prices, producers experiencing improved drilling economics and continued improvements in productionfinancial stability into 2021 due to enhanced completion techniques. While commoditycash on hand from our June 2020 equity issuance, cash flows from operations and access to our undrawn $2.5 Billion Credit Agreement. We have no debt maturities prior to 2022, and our investment-grade credit ratings have remained stable.
prices decreasedSustainability - In 2020, we were included in the fourth quarter 2018Dow Jones Sustainability North America Index for the second consecutive year and added to the Dow Jones Sustainability World Index (DJSI World), which recognize companies for industry-leading
environmental, social and governance performance. We are expectedcurrently the only North American energy company included in the DJSI World group of global sustainability leaders. We continue to fluctuatelook for ways to reduce our environmental impact and utilize more efficient technologies. We are preparing for the future energy transition and our role in 2019, we do not expect a material impact onmeeting the world’s energy needs in an environmentally responsible way.
Growth Projects - We operate an integrated, reliable and diversified network of NGL and natural gas gathering, processing, fractionation, storage and transportation assets connecting supply volumes across our business segments.
For most of 2018, we benefited from favorable NGL price differentials as available pipeline and fractionation capacity in and between the Conway, Kansas, and Mont Belvieu, Texas, market centers tightened due to growing NGL supply from theRocky Mountain, Mid-Continent and Rocky MountainPermian regions combined with increased petrochemical and NGL export demand in the Gulf Coast, resulting in higher earnings from our Natural Gas Liquids segment’s optimization and marketing activities. In the fourth quarter 2018, these differentials narrowed resulting from seasonality of supply and demand in the Mid-Continent region, lower commodity prices and additional pipeline and fractionation capacity resulting from operational efficiencies. While we expect NGL price differentials to be volatile in 2019, we expect that they will be wider than historical norms due to additional demand in the Gulf Coast, additional NGL supply growth in the Mid-Continent region and continuing fractionation and pipeline constraints.key market centers. We expect these wider NGL price differentials to continue until announced NGL pipeline and fractionation infrastructure projects, including our Arbuckle II pipeline, arehave completed in early 2020.
Ethane Opportunity - Ethane volumes delivered to our NGL system have been increasing since 2016, primarily as a result of NGL demand increasing from exports and petrochemical companies completing ethylene production projects and plant expansions. Ethane volumes across our system increased to 380 MBbl/d in 2018, compared with 315 MBbl/d in 2017. Our NGLsignificant capital-growth projects are expected to help alleviate system constraints, enabling additional NGLs, including ethane, to reach the Mont Belvieu, Texas, market center. We expect the amount of ethane delivered to our system to continue to fluctuate as NGL supply continues to increase, petrochemical companies complete expansion projects and exports increase.
Growth Projects - Increased producer activity and supply growth across our assets have increased demand for midstream infrastructure. We are responding to this growing demand by constructing assets to meet the needs of natural gas processors and producers across our operating regions, including the Williston, Permian, Powder River and DJ Basins and the STACK and SCOOP areas. We also expect additional demand for our services to support increased demand for NGL products from the petrochemical industry and NGL exporters, and increased demand for natural gas from exports and power plants, some of which rely on natural gas when renewable energy is not available.
We have spent approximately $2 billion of our announced $6 billion of additional capital-growth projects, includingthat include NGL pipelines, NGL fractionators, and natural gas processing plants that are designed to serve the expected growth and needs ofrelated natural gas processors and producersNGL infrastructure. These projects provide us the capacity to benefit from future supply growth without significant capital investment. In the first quarter 2020, due to the decline in commodity prices and economic demand disruption caused by COVID-19, we suspended our announced plans to construct the petrochemical industry. We expect these growth projects to provide long-term fee-based earnings and incremental cash flows. We have contracted for, and taken delivery of, a substantial amountDemicks Lake III natural gas processing plant, the fourth expansion of the steel pipe required forONEOK West Texas NGL pipeline system, and reduced the scope of the expansion of our Elk Creek pipeline and various other paused projects. These projects from vendors located predominately in the United States. In addition to our large capital-growth projects discussed below, we are expanding our natural gas pipeline infrastructure in the Permian Basin and Oklahoma to providecan be restarted quickly when producer activity warrants additional natural gas takeaway capacity in these regions.infrastructure. Our announced large capital-growth projects are outlined in the tablestable below:
|
| | | | | | | | | | |
Project (b) | Scope | Approximate Costs (a) | Completion Date |
Natural Gas Gathering and Processing | (In millions) | |
Additional STACK processing capacity | 200 MMcf/d processing capacity through long-term processing services agreement | $40 | Complete |
| 30-mile natural gas gathering pipeline | | |
Canadian Valley expansion and related infrastructure | 200 MMcf/d processing plant expansion in the STACK area and related gathering infrastructure | 160 | Complete |
| Increases capacity to more than 400 MMcf/d | | |
| 20 MBbl/d additional NGL volume | | |
| Supported by acreage dedications, long-term primarily fee-based contracts and minimum volume commitments | | |
Demicks Lake I plant and related infrastructure | 200 MMcf/d processing plant and related gathering infrastructure in the core of the Williston Basin | $400 | Fourth QuarterCompleted October 2019 |
| Supported by acreage dedications with long-term primarily fee-based contracts | | |
Demicks Lake II plant and related infrastructure | 200 MMcf/d processing plant and related gathering infrastructure in the core of the Williston Basin | $410 | First QuarterCompleted January 2020 |
| Supported by acreage dedications with long-term primarily fee-based contracts | | |
Total Natural Gas GatheringBear Creek plant expansion and Processingrelated infrastructure | $1,010200 MMcf/d processing plant expansion and related gathering infrastructure in the Williston Basin | $405 | Paused (c) |
| Supported by acreage dedications with long-term primarily fee-based contracts | | |
| | | |
| | | |
|
| | | |
Project | Scope | Approximate Costs (a) | Completion Date |
Natural Gas Liquids | | (In millions)
| |
West Texas LPG pipeline expansion | 120-mile pipeline lateral extension with capacity of 110 MBbl/d in the Permian Basin | $200 (b) | Complete |
| Supported by long-term dedicated NGL production from two planned third-party natural gas processing plants | | |
Sterling III pipeline expansion and Arbuckle connection | 60 MBbl/d NGL pipeline expansion | 130 | Complete |
Increases capacity to 250 MBbl/d | | |
| Includes additional NGL gathering system expansions | | |
| Supported by long-term third-party contracts | | |
Elk Creek pipeline and related infrastructure | 900-mile NGL pipeline from the Williston Basin to the Mid-Continent region, with initial capacity of up to 240 MBbl/d, and related infrastructure | $1,400 | Fourth QuarterCompleted December 2019 (c) |
| Anchored by long-term contracts supported primarily by minimum volume commitments | | |
| Expansion capability up to 400 MBbl/d with additional pump facilities | | |
Arbuckle II pipeline and related infrastructure | 530-mile NGL pipeline from the STACK area to Mont Belvieu, Texas, with initial capacity up to 400 MBbl/d, and related infrastructure | $1,360 | First QuarterCompleted March 2020 |
| Supported by long-term contracts | | |
| Expansion capability up to 1,000 MBbl/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 |
Connecting West Texas LPG pipeline system to the previously announced Arbuckle II pipeline | | |
| Supported by long-term dedicated production from six third-party processing plants expected to produce up to 60 MBbl/d | | |
MB-4 fractionator and related infrastructure | 125 MBbl/d NGL fractionator in Mont Belvieu, Texas, and related infrastructure, which includes additional NGL storage in Mont Belvieu | $575 | First QuarterCompleted March 2020 (d) |
| Fully contracted with long-term contracts | | |
ONEOK West Texas NGL pipeline expansion and Arbuckle II connection | Increasing mainline capacity by 80 MBbl/d with additional pump facilities and pipeline looping | $295 | Completed June 2020 (e) |
Connecting ONEOK West Texas NGL 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 | | |
Bakken NGL pipeline extension | 75-mile NGL pipeline in the Williston Basin connecting to a third-party processing plant | $100 | Completed August 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 2021Completed |
Allow increasing volumes on ourthe Elk Creek pipeline access to fractionation capacity at Mont Belvieu, Texas | | August 2020 |
Arbuckle II pipeline expansion | Increasing mainline capacity by 100 MBbl/d with additional pump facilities | $60 | First Quarter 2021Paused (c) |
| 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 2021Paused (c) |
| Fully contracted with long-term contracts | | |
Total Natural Gas LiquidsONEOK West Texas NGL pipeline expansion | Increasing mainline capacity by 40 MBbl/d | $5,010145 | Paused (c) |
TotalSupported by long-term dedicated production from third-party processing plants expected to produce up to 45 MBbl/d | | $6,020 |
Mid-Continent fractionation facility expansions | 65 MBbl/d of expansions at our Mid-Continent NGL facilities | $150 | Paused (c) |
| | | |
| | |
| | | |
| | |
(a) - Excludes capitalized interest/AFUDC.
(b) - Reflects total project cost. In July 2018, we acquiredProjects listed exclude our suspended capital-growth projects, which include the remaining 20 percent interestDemicks Lake III natural gas processing plant, the fourth expansion of the ONEOK West Texas NGL pipeline system and a reduction in WTLPG.the scope of the expansion of the Elk Creek pipeline.
(c) - 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 date.
(d) - We completed 75 MBbl/d in December 2019 and completed the remaining 50 MBbl/d in March 2020.
(e) - We completed expansions to increase mainline capacity by approximately 45 MBbl/d in the first quarter 2020 and completed the remaining portion of this project in the second quarter 2020, which was delayed due to weather.
Ethane Production - Ethane production fluctuates over short-term periods driven by ethane economics, and as a result, volumes can also fluctuate period to period. Ethane volumes under long-term contracts delivered to our NGL system averaged 375 MBbl/d in 2020, compared with 385 MBbl/d in 2019, but increased by approximately 30 MBbl/d in the second half of 2020, compared with the second quarter 2020, due primarily to improved ethane economics. We expect the southern section of the pipelineethane production to be in service as early as the third quarter 2019.continue to fluctuate throughout 2021.
Debt Issuances and Repayments - In November 2018, we entered into our $1.5 Billion Term Loan Agreement with a syndicate of banks, which is available to be drawn until May 2019. Our $1.5 Billion Term Loan Agreement matures in November 2021 and bears interest at LIBOR plus 112.5 basis points based on our current credit ratings. The agreement contains an option, which may be exercised up to two times, to extend the term of the loan, in each case, for an additional one-year term subject to approval of the banks. Our $1.5 Billion Term Loan Agreement allows prepayment of all or any portion outstanding, without penalty or premium, and contains substantially the same covenants as those contained in our $2.5 Billion Credit Agreement. As of December 31, 2018, we had borrowings totaling $550 million outstanding under our $1.5 Billion Term Loan Agreement, which were used for general corporate purposes, including repayment of existing indebtedness.
In July 2018,2020, we completed an underwritten public offering of $1.25$1.5 billion senior unsecured notes consisting of $800$600 million, 4.55 percent5.85% senior notes due 2028 and $4502026; $600 million, 5.2 percent6.35% senior notes due 2048.2031; and $300 million, 7.15% senior notes due 2051. The net proceeds, after deducting underwriting discounts, commissions and offering expenses, were $1.23$1.48 billion. A portion of the proceeds was used to repay the outstanding borrowings under our $1.5 Billion Term Loan Agreement. The remainder was used for general corporate purposes.
In 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 was used to pay all outstanding amounts under our commercial paper program. The remainder was used for general corporate purposes, which included repayment of other existing indebtedness and funding capital expenditures.
In 2020, we repurchased in the open market outstanding principal of certain of our senior notes in the amount of $224.4 million for an aggregate repurchase price of $199.6 million with cash on hand. In connection with these open market repurchases, we recognized $22.3 million of net gains on extinguishment of debt.
Equity Issuances - In January 2018,June 2020, we completed an underwritten public offering of 21.929.9 million shares of our common stock at a public offering price of $54.50$32.00 per share, generating net proceeds, after deducting underwriting discounts, commissions and offering expenses, of $1.2 billion. We$937.0 million. A portion of the proceeds was, and we anticipate the remainder will be, used the net proceeds from this offering to fund capital expenditures and for general corporate purposes, which included repaying a portionincluding repayment of our outstanding indebtedness.existing indebtedness and funding capital expenditures.
Dividends - During 2018,2020, we paid dividends totaling $3.245$3.74 per share, an increase of 19 percent6% from the $2.72$3.53 per share paid in 2017.2019. In February 2019,2021, we maintained and paid a quarterly dividend of $0.86$0.935 per share ($3.443.74 per share on an annualized basis), an increase of 12 percent comparedwhich is consistent with the same quarter in the prior year. In 2018, 83 percent
Impairments-Due to historic events as a result of COVID-19 impacting supply, demand and commodity prices, in 2020 we evaluated our dividend payments to investors were a return of capital. Our dividend growth is due to the increase in cash flows resulting from the continued growth of our operations.
Tax Cuts and Jobs Act -In December 2017 the Tax Cuts and Jobs Act made extensive changes to the U.S. tax laws, including provisions that reduce the highest U.S. corporate tax rate to 21 percent from 35 percent, increase expensing for capital investment, and limit the interest deduction and use of net operating losses to offset future taxable income. Because tax expense can be, but is not always, a component of the rates charged by interstate natural gas pipelines, FERC issued a final rule requiring each interstate natural gas pipeline to submit a filing addressing any impact of the Tax Cuts and Jobs Act on its FERC-regulated rates. The applicable filings were completed for each of our wholly ownedgoodwill, certain long-lived asset groups and equity investment interstate natural gas pipelines, and we expect no material impact to our results of operations.
Revenue Recognition - We adopted Topic 606 on January 1, 2018, using the modified retrospective method. Resultsinvestments for reporting periods beginning after January 1, 2018, are presented under Topic 606, while prior periods are not adjusted and continue to be reported under the accounting standards in effect for those periods. The primary impact to our financial results is a classification change between line items in our Consolidated Income Statement, with an immaterial impact on net income.impairment. Based on the new guidance,results, we determined that certain recorded the following impairment charges:
Natural Gas Gathering and Processing segment POP with fee contracts - In 2020, we recorded $382.2 million of noncash impairment charges related primarily to certain long-lived asset groups that were not recoverable, $153.4 million of noncash 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 segment exchange services contracts that include the purchase- In 2020, we recorded $71.6 million of commodities are supplier contracts. Therefore, contractual fees in these identified contracts are now recordednoncash impairment charges related primarily to certain inactive assets as a reductionour expectation for future use of the commodity purchase price in costassets changed and $7.2 million of sales and fuel rather than as services revenue. To the extent we hold inventorynoncash impairment charges related to these purchases,our 50% investment in Chisholm Pipeline Company.
For additional information on our impairment charges, see Notes A, D, E and M of the related fees previously recordedNotes to Consolidated Financial Statements in services revenue will not be recognized until the inventory is sold. The adoption of Topic 606 did not materially impact our reported operating income, net income or adjusted EBITDA.this Annual Report.
FINANCIAL RESULTS AND OPERATING INFORMATION
ConsolidatedHow We Evaluate Our Operations
Selected Financial Results - The following table sets forth certain selectedManagement uses a variety of financial and operating metrics to analyze our performance. Our consolidated financial metrics include: (1) operating income; (2) net income; (3) diluted EPS; and (4) the following non-GAAP financial measures: adjusted EBITDA and distributable cash flow. We evaluate segment operating results using adjusted EBITDA and our operating metrics, which include various volume and rate statistics that are relevant for the periods indicated:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Variances | | Variances |
| | Years Ended December 31, | | 2018 vs. 2017 | | 2017 vs. 2016 |
Financial Results | | 2018 | | 2017 | | 2016 | | Increase (Decrease) | | Increase (Decrease) |
| | (Millions of dollars) |
Revenues | | | | | | | | | | | | | | |
Commodity sales | | $ | 11,395.6 |
| | $ | 9,862.7 |
| | $ | 6,858.5 |
| | $ | 1,532.9 |
| | 16 | % | | $ | 3,004.2 |
| | 44 | % |
Services | | 1,197.6 |
| | 2,311.2 |
| | 2,062.4 |
| | (1,113.6 | ) | | (48 | )% | | 248.8 |
| | 12 | % |
Total revenues | | 12,593.2 |
| | 12,173.9 |
| | 8,920.9 |
| | 419.3 |
| | 3 | % | | 3,253.0 |
| | 36 | % |
Cost of sales and fuel (exclusive of items shown separately below) | | 9,422.7 |
| | 9,538.0 |
| | 6,496.1 |
| | (115.3 | ) | | (1 | )% | | 3,041.9 |
| | 47 | % |
Operating costs | | 907.0 |
| | 822.7 |
| | 747.0 |
| | 84.3 |
| | 10 | % | | 75.7 |
| | 10 | % |
Depreciation and amortization | | 428.6 |
| | 406.3 |
| | 391.6 |
| | 22.3 |
| | 5 | % | | 14.7 |
| | 4 | % |
Impairment of long-lived assets | | — |
| | 16.0 |
| | — |
| | (16.0 | ) | | (100 | )% | | 16.0 |
| | * |
|
Gain on sale of assets | | (0.6 | ) | | (0.9 | ) | | (9.6 | ) | | (0.3 | ) | | (33 | )% | | (8.7 | ) | | (91 | )% |
Operating income | | $ | 1,835.5 |
| | $ | 1,391.8 |
| | $ | 1,295.8 |
| | $ | 443.7 |
| | 32 | % | | $ | 96.0 |
| | 7 | % |
Equity in net earnings from investments | | $ | 158.4 |
| | $ | 159.3 |
| | $ | 139.7 |
| | $ | (0.9 | ) | | (1 | )% | | $ | 19.6 |
| | 14 | % |
Impairment of equity investments | | $ | — |
| | $ | (4.3 | ) | | $ | — |
| | $ | (4.3 | ) | | (100 | )% | | $ | 4.3 |
| | * |
|
Interest expense, net of capitalized interest | | $ | (469.6 | ) | | $ | (485.7 | ) | | $ | (469.7 | ) | | $ | (16.1 | ) | | (3 | )% | | $ | 16.0 |
| | 3 | % |
Net income | | $ | 1,155.0 |
| | $ | 593.5 |
| | $ | 743.5 |
| | $ | 561.5 |
| | 95 | % | | $ | (150.0 | ) | | (20 | )% |
Adjusted EBITDA | | $ | 2,447.5 |
| | $ | 1,986.9 |
| | $ | 1,849.9 |
| | $ | 460.6 |
| | 23 | % | | $ | 137.0 |
| | 7 | % |
Capital expenditures | | $ | 2,141.5 |
| | $ | 512.4 |
| | $ | 624.6 |
| | $ | 1,629.1 |
| | * |
| | $ | (112.2 | ) | | (18 | )% |
* Percentage change is greater than 100 percent or is not meaningful.
See reconciliationrespective segment. These operating metrics allow investors to analyze the various components of net income to adjusted EBITDAsegment financial results in the “Adjusted EBITDA” section.
Changes in commodity prices, salesterms of volumes and the impact of the adoption of Topic 606, as described in Note O of the Notesrate/price. Management uses these metrics to Consolidated Financial Statements in this Annual Report, 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.
2018 vs. 2017 - Operating income increased primarily as a result of the following:
an increase of $342.9 million due to Natural gas and NGL volume growth, primarily in the Williston Basin and STACK and SCOOP areas in our Natural Gas Gathering and Processing and Natural Gas Liquids segments;
an increase of $150.4 million due to higher optimization and marketing earnings primarily from wider location price differentials in our Natural Gas Liquids segment;
an increase of $36.4 million from higher transportation services due primarily to increased interruptible volumes and firm transportation capacity contracted in our Natural Gas Pipelines segment; and
an increase of $16.0 million resulting from the impact of noncash impairment charges in 2017 related to nonstrategic long-lived assets in our Natural Gas Gathering and Processing segment; offset partially by
an increase in operating costs of $84.3 million due primarily to higher employee-related costs associated with labor and benefits, higher materials, supplies, outside services, noncash compensation and spending on routine maintenance projects, offset partially by the $30.0 million impact of the Merger Transaction included in 2017 operating costs; and
an increase in depreciation expense of $22.3 million due to capital projects placed in service.
Net income increased due to the items discussed above, a one-time noncash charge through income tax expense of $141.3 million in 2017, related to revaluation of our deferred tax balances and a valuation allowance on certain state net operating loss and tax credit carryforwards resulting from the enactment of the Tax Cuts and Jobs Act and $20.0 million of noncash expenses related to our Series E Preferred Stock contribution to the Foundation made in 2017.
Capital expenditures increased due primarily to spending on our announced capital-growth projects.
2017 vs. 2016 - Operating income increased primarily as a result of the following:
an increase of $147.5 million due to natural gas and NGL volume growth in the Williston Basin and STACK and SCOOP areas in our Natural Gas Gathering and Processing and Natural Gas Liquids segments;
an increase of $44.0 million due to restructured contracts resulting in higher fee revenues from increased average fee rates and a lower percentage of proceeds retained from the sale of commodities under our POP with fee contracts in our Natural Gas Gathering and Processing segment;
an increase of $26.9 from higher transportation services due to higher firm transportation capacity contracted in our Natural Gas Pipelines segment; and
an increase of $13.5 due to higher optimization and marketing earnings due to higher optimization volumes and wider location price differentials in our Natural Gas Liquids segment; offset partially by
an increase in operating costs of $45.7 million due to higher labor and employee-related costs associated with benefit plans, routine maintenance projects and higher ad valorem taxes;
an increase in operating costs of $30.0 million due to Merger Transaction costs in 2017;
a decrease of $16.0 million due to noncash impairment charges related to nonstrategic long-lived assets in our Natural Gas Gathering and Processing segment; and
a decrease of $11.9 million due to lower net realized natural gas prices and condensate prices, net of hedges in our Natural Gas Gathering and Processing segment.
Net income was further impacted by a one-time noncash charge through income tax expense of $141.3 million, related to revaluation of our deferred tax balances and a valuation allowance on certain state net operating loss and tax credit carryforwards resulting from the enactment of the Tax Cuts and Jobs Act and $20.0 million of noncash expenses related to our Series E Preferred Stock contribution to the Foundation.
Equity in net earnings from investments increased due primarily to higher firm transportation revenues related to Roadrunner’s Phase II capacity, which was placed in service in October 2016. Roadrunner is fully subscribed under long-term firm demand charge contracts.
Capital expenditures decreased due primarily to growth projects placed in service in 2016 in our Natural Gas Gathering and Processing segment.
Additional information regarding ouranalyze historical segment financial results and as the key inputs for forecasting and budgeting segment financial results. For additional information on our operating information is provided inmetrics, see the following discussion for eachrespective segment subsections of our segments.
Natural Gas Gathering and Processing
Growth Projects - Our Natural Gas Gathering and Processing segment is investing in growth projects in NGL-rich areas, including the Bakken Shale and Three Forks formations in the Williston Basin and the STACK and SCOOP areas, that we expect will enable us to meet the needs of crude oil and natural gas producers in those areas. See “Growth Projects” in the “Recent Developments” section for discussion of our announced capital-growth projects.
For a discussion of our capital expenditure financing, see “Capital Expenditures” in the “Liquidity and Capital Resources” section.
Selected Financialthis “Financial Results and Operating Information -The following tables set forth certain selected financial results and operating information for our Natural Gas Gathering and Processing segment for the periods indicated:Information” section.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Variances | | Variances |
| | Years Ended December 31, | | 2018 vs. 2017 | | 2017 vs. 2016 |
Financial Results | | 2018 | | 2017 | | 2016 | | Increase (Decrease) | | Increase (Decrease) |
| | (Millions of dollars) |
NGL sales | | $ | 1,567.2 |
| | $ | 1,208.0 |
| | $ | 586.0 |
| | $ | 359.2 |
| | 30 | % | | $ | 622.0 |
| | * |
|
Condensate sales | | 208.8 |
| | 103.2 |
| | 58.3 |
| | 105.6 |
| | * |
| | 44.9 |
| | 77 | % |
Residue natural gas sales | | 1,084.2 |
| | 856.3 |
| | 690.6 |
| | 227.9 |
| | 27 | % | | 165.7 |
| | 24 | % |
Gathering, compression, dehydration and processing fees and other revenue | | 174.4 |
| | 859.1 |
| | 716.7 |
| | (684.7 | ) | | (80 | )% | | 142.4 |
| | 20 | % |
Cost of sales and fuel (exclusive of depreciation and operating costs) | | (2,041.4 | ) | | (2,216.4 | ) | | (1,331.5 | ) | | (175.0 | ) | | (8 | )% | | 884.9 |
| | 66 | % |
Operating costs, excluding noncash compensation adjustments | | (357.7 | ) | | (302.6 | ) | | (283.4 | ) | | 55.1 |
| | 18 | % | | 19.2 |
| | 7 | % |
Equity in net earnings from investments, excluding noncash impairment charges | | 0.4 |
| | 12.1 |
| | 10.7 |
| | (11.7 | ) | | (97 | )% | | 1.4 |
| | 13 | % |
Other | | (4.3 | ) | | (1.2 | ) | | (0.6 | ) | | (3.1 | ) | | * |
| | (0.6 | ) | | (100 | )% |
Adjusted EBITDA | | $ | 631.6 |
| | $ | 518.5 |
| | $ | 446.8 |
| | $ | 113.1 |
| | 22 | % | | $ | 71.7 |
| | 16 | % |
Impairment of equity investments | | $ | — |
| | $ | (4.3 | ) | | $ | — |
| | $ | (4.3 | ) | | (100 | )% | | $ | 4.3 |
| | * |
|
Capital expenditures | | $ | 694.6 |
| | $ | 284.2 |
| | $ | 410.5 |
| | $ | 410.4 |
| | * |
| | $ | (126.3 | ) | | (31 | )% |
* Percentage change is greater than 100 percent or is not meaningful.
See reconciliation of net income to adjusted EBITDA in the “Adjusted EBITDA” section.
Changes in commodity prices and sales volumes and the impact of the adoption of Topic 606, as described in Note O of the Notes to ConsolidatedNon-GAAP Financial Statements in this Annual Report, affect both revenue and cost of sales and fuel, and, therefore, the impact is largely offset between these line items.
2018 vs. 2017Measures - Adjusted EBITDA, increased $113.1 million, primarily as a result of the following:
an increase of $159.2 million due primarily to natural gas volume growth in the Williston Basindistributable cash flow and the STACK and SCOOP areas, offset partially by natural production declines; and
an increase of $22.3 million due primarily to higher realized NGL and condensate prices, net of hedges, offset partially by lower realized natural gas prices, net of hedges; offset partially by
an increase of $55.1 million in operating costs due primarily to increased materials and supplies and outside services related to the growth of our operations and higher employee-related costs associated with labor and benefits; and
a decrease of $11.7 million due primarily to lower equity in net earnings from investments due to a decrease in supply volumes in the coal-bed methane area of the Powder River Basin.
Capital expenditures increased due to our announced capital-growth projects and increased well connections.
2017 vs. 2016 - Adjusted EBITDA increased $71.7 million, primarily as a result of the following:
an increase of $66.0 million due primarily to natural gas volume growth in the Williston Basin and the STACK and SCOOP areas, offset partially by natural production declines and the impact of severe winter weather in the first quarter 2017; and
an increase of $44.0 million due primarily to restructured contracts resulting in higher fee revenues from increased average fee rates, offset partially by a lower percentage of proceeds retained from the sale of commodities under our POP with fee contracts; offset partially by
an increase of $19.2 million in operating costs due primarily to higher employee-related costs associated with labor and benefits and the growth of our operations;
a decrease of $11.9 million due primarily to lower realized natural gas and condensate prices, net of hedges; and
a decrease of $8.0 million due to contract settlements in 2016.
Capital expenditures decreased due to growth projects placed in service in 2016.
|
| | | | | | | | | | | | |
| | Years Ended December 31, |
Operating Information (a) | | 2018 | | 2017 | | 2016 |
Natural gas gathered (BBtu/d) | | 2,546 |
| | 2,211 |
| | 2,034 |
|
Natural gas processed (BBtu/d) (b) | | 2,382 |
| | 2,056 |
| | 1,882 |
|
NGL sales (MBbl/d) | | 198 |
| | 187 |
| | 156 |
|
Residue natural gas sales (BBtu/d) | | 1,088 |
| | 896 |
| | 865 |
|
Average fee rate ($MMBtu) | | $ | 0.90 |
| | $ | 0.86 |
| | $ | 0.76 |
|
(a) - Includes volumes for consolidated entities only.
(b) - Includes volumes at company-owned and third-party facilities.
Natural gas gathered, natural gas processed, NGL sales and residue natural gas sales volumes increased in 2018, compared with 2017, due primarily to the following:
producers focusing their drilling and completion in the most productive areas with favorable economics where we have significant gathering and processing assets; and
continued producer improvements in production due to enhanced completion techniques; offset partially by
natural production declines.
Natural gas gathered, natural gas processed, NGL sales and residue natural gas sales increased in 2017, compared with 2016, due to the completion of growth projects and new supply in the Williston Basin and the STACK and SCOOP areas, offset partially by natural production declines on existing wells and the impact of severe winter weather in the first quarter 2017.
The quantity and composition of NGLs and natural gasdividend coverage ratio are expected to continue to change with anticipated production increases across our supply basins, new processing plants placed in service and increased ethane recovery.
Commodity Price Risk - See discussion regarding our commodity price risk under “Commodity Price Risk” in Item 7A, Quantitative and Qualitative Disclosures about Market Risk.
Impairment Charges - In 2017, following a review of nonstrategic assets for potential divestiture, we recorded $16.0 million of noncash impairment charges related to certain nonstrategic gathering and processing assets located in North Dakota and $4.3 million of noncash impairment charges related to a nonstrategic equity investment located in Oklahoma.
Natural Gas Liquids
Growth Projects - Our growth strategy in our Natural Gas Liquids segment is focused around the crude oil and NGL-rich natural gas drilling activity in shale and other nonconventional resource areas from the Rocky Mountain region through the Mid-Continent region and the Permian Basin. Crude oil, natural gas and NGL production from this activity; higher petrochemical industry demand for NGL products; and increased exports have resulted in our making additional capital investments to expand our infrastructure to bring these commodities from supply basins to market.
Our Natural Gas Liquids segment invests in NGL-related projects to transport, fractionate, store and deliver to the market NGL supply from shale and other resource development areas across our asset base and alleviate expected infrastructure constraints between the Mid-Continent and Gulf Coast market centers and to meet increasing petrochemical industry and NGL export demand in the Gulf Coast. See “Growth Projects” in the “Recent Developments” section for discussion of our announced capital-growth projects.
We continue to evaluate opportunities to increase the capacity of our gathering, fractionation, storage and distribution assets or construct new assets to connect supply growth from the Williston and Powder River Basins, Mid-Continent region and Permian Basin with end-use markets.
In 2018, we connected five third-party natural gas processing plants to our NGL system in the STACK and SCOOP areas, one in the Rocky Mountain region and one in the Permian Basin. Two natural gas processing plants, one third-party and one in our Natural Gas Gathering and Processing segment, also were expanded in the STACK and SCOOP areas of the Mid-Continent region.
For a discussion of our capital expenditure financing, see “Capital Expenditures” in the “Liquidity and Capital Resources” section.
Selected Financial Results and Operating Information -The following tables set forth certain selected financial results and operating information for our Natural Gas Liquids segment for the periods indicated:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Variances | | Variances |
| | Years Ended December 31, | | 2018 vs. 2017 | | 2017 vs. 2016 |
Financial Results | | 2018 | | 2017 | | 2016 | | Increase (Decrease) | | Increase (Decrease) |
| | (Millions of dollars) |
NGL and condensate sales | | $ | 10,319.9 |
| | $ | 8,998.9 |
| | $ | 6,152.5 |
| | $ | 1,321.0 |
| | 15 | % | | $ | 2,846.4 |
| | 46 | % |
Exchange service revenues and other | | 415.7 |
| | 1,430.3 |
| | 1,327.5 |
| | (1,014.6 | ) | | (71 | )% | | 102.8 |
| | 8 | % |
Transportation and storage revenues | | 199.0 |
| | 197.0 |
| | 195.7 |
| | 2.0 |
| | 1 | % | | 1.3 |
| | 1 | % |
Cost of sales and fuel (exclusive of depreciation and operating costs) | | (9,176.8 | ) | | (9,176.5 | ) | | (6,321.4 | ) | | 0.3 |
| | — | % | | 2,855.1 |
| | 45 | % |
Operating costs, excluding noncash compensation adjustments | | (378.3 | ) | | (351.3 | ) | | (326.1 | ) | | 27.0 |
| | 8 | % | | 25.2 |
| | 8 | % |
Equity in net earnings from investments | | 67.1 |
| | 59.9 |
| | 54.5 |
| | 7.2 |
| | 12 | % | | 5.4 |
| | 10 | % |
Other | | (6.0 | ) | | (3.4 | ) | | (3.1 | ) | | (2.6 | ) | | (76 | )% | | (0.3 | ) | | (10 | )% |
Adjusted EBITDA | | $ | 1,440.6 |
| | $ | 1,154.9 |
| | $ | 1,079.6 |
| | $ | 285.7 |
| | 25 | % | | $ | 75.3 |
| | 7 | % |
Capital expenditures | | $ | 1,306.3 |
| | $ | 114.3 |
| | $ | 105.9 |
| | $ | 1,192.0 |
| | * |
| | $ | 8.4 |
| | 8 | % |
* Percentage change is greater than 100 percent.
See reconciliation of net income to adjusted EBITDA in the “Adjusted EBITDA” section.
Changes in commodity prices and sales volumes and the impact of the adoption of Topic 606, as described in Note O of the Notes to Consolidated Financial Statements in this Annual Report, affect both revenues and cost of sales and fuel, and, therefore, the impact is largely offset between these line items.
2018 vs. 2017 - Adjusted EBITDA increased $285.7 million, primarily as a result of the following:
an increase of $164.6 million in exchange services due to $183.7 million in higher volumes primarily in the STACK and SCOOP areas and the Williston Basin and $52.3 million in higher average fee rates in the Mid-Continent region and Permian Basin, offset partially by $56.6 million in higher third-party fractionation and rail transportation costs and $19.8 million in higher power costs due to increased volumes;
an increase of $150.4 million in optimization and marketing due primarily to wider location price differentials, which includes the $15.0 million unfavorable impact of higher NGL products in inventory at the end of the year due to facility maintenance in the fourth quarter 2018. We expect the earnings benefit on physical-forward sales of this inventory in the first quarter 2019; and
an increase of $7.2 million in equity in net earnings from investments due primarily to higher volumes delivered to the Overland Pass pipeline; offset partially by
an increase of $27.0 million in operating costs due primarily to higher employee-related costs associated with labor and benefits, spending on routine maintenance projects and higher ad valorem taxes, offset partially by the impact of Hurricane Harvey on operating costs in 2017; and
a decrease of $6.8 million in transportation and storage services due primarily to lower storage capacity contracted with third parties in the Mid-Continent region.
Capital expenditures increased due primarily to spending on our announced capital-growth projects.
2017 vs. 2016 - Adjusted EBITDA increased $75.3 million, primarily as a result of the following:
an increase of $81.5 million in exchange services due primarily to higher volumes in the Williston Basin, the STACK and SCOOP areas and the Powder River Basin and ethane recovery; offset partially by lower volumes in the Granite Wash and Barnett Shale and reduced volumes related to Hurricane Harvey;
an increase of $13.5 million in our optimization and marketing activities due primarily to higher optimization volumes and wider location price differentials; and
an increase of $5.4 million in equity in net earnings from investments due primarily to higher volumes delivered to the Overland Pass pipeline from our Bakken NGL pipeline and higher volumes and increased ethane recovery from plants connected to the Overland Pass pipeline; offset partially by
an increase of $25.2 million in operating costs due primarily to routine maintenance projects, higher ad valorem taxes, higher employee-related costs associated with labor and benefits, and additional operating costs related to Hurricane Harvey.
Capital expenditures increased due primarily to increased routine growth and maintenance projects.
|
| | | | | | | | | | | | |
| | Years Ended December 31, |
Operating Information | | 2018 | | 2017 | | 2016 |
Raw feed throughput (MBbl/d) (a) | | 1,010 |
| | 895 |
| | 836 |
|
NGLs transported - gathering lines (MBbl/d) (b) | | 912 |
| | 812 |
| | 770 |
|
NGLs fractionated (MBbl/d) (c) | | 715 |
| | 621 |
| | 586 |
|
Average Conway-to-Mont Belvieu OPIS price differential - ethane in ethane/propane mix ($/gallon) | | $ | 0.15 |
| | $ | 0.05 |
| | $ | 0.03 |
|
(a) - Represents physical raw feed volumes on which we charge a fee for transportation and/or fractionation services.
(b) - Includes volumes for consolidated entities only.
(c) - Includes volumes at company-owned and third-party facilities.
2018 vs. 2017 - Volumes increased primarily from the STACK and SCOOP areas and Williston Basin. While overall volumes, including ethane, increased, a portion of the contractual fees associated with those volumes gathered and fractionated was previously being earned under contracts with minimum volume obligations.
2017 vs. 2016 - Volumes increased primarily from the STACK and SCOOP areas and Williston Basin resulting from plant connections, increased supply and increased ethane recovery, which was offset partially by decreased volumes from the Barnett Shale and Granite Wash. Volumes also increased from the Permian Basin. While overall volumes and ethane recovery increased, a portion of the fees associated with those volumes gathered and fractionated was previously being earned under contracts with minimum volume obligations.
Natural Gas Pipelines
Growth Projects - Our natural gas pipelines primarily serve end users, such as natural gas distribution and electric-generation companies, that require natural gas to operate their businesses regardless of location price differentials. The development of shale and other resource areas has continued to increase available natural gas supply, and we expect producers and natural gas processors to require incremental transportation services in the future as additional supply is developed.
We are expanding our natural gas pipeline infrastructure in Oklahoma and the Permian Basin. The projects include an eastbound expansion of our ONEOK Gas Transportation system by 150 MMcf/d from the STACK and SCOOP areas to an interstate pipeline delivery point in eastern Oklahoma, a westbound expansion of our ONEOK Gas Transportation system by 100 MMcf/d from the STACK area to multiple interstate pipeline delivery points in western Oklahoma, and an expansion of our WesTex Transmission system by 300 MMcf/d from the Permian Basin to interstate pipeline delivery points in the Texas Panhandle. Additionally, we completed an expansion project on our Roadrunner joint venture to make the pipeline bidirectional, which will result in approximately 1.0 Bcf/d of eastbound transportation capacity from the Delaware Basin to the Waha area.
See “Capital Expenditures” in “Liquidity and Capital Resources” for additional detail of our projected capital expenditures.
Selected Financial Results and Operating Information -The following tables set forth certain selected financial results and operating information for our Natural Gas Pipelines segment for the periods indicated:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Variances | | Variances |
| | Years Ended December 31, | | 2018 vs. 2017 | | 2017 vs. 2016 |
Financial Results | | 2018 | | 2017 | | 2016 | | Increase (Decrease) | | Increase (Decrease) |
| | (Millions of dollars) |
Transportation revenues | | $ | 333.7 |
| | $ | 323.7 |
| | $ | 288.5 |
| | $ | 10.0 |
| | 3 | % | | $ | 35.2 |
| | 12 | % |
Storage revenues | | 60.3 |
| | 59.2 |
| | 60.0 |
| | 1.1 |
| | 2 | % | | (0.8 | ) | | (1 | )% |
Natural gas sales and other revenues | | 37.7 |
| | 37.0 |
| | 30.9 |
| | 0.7 |
| | 2 | % | | 6.1 |
| | 20 | % |
Cost of sales and fuel (exclusive of depreciation and operating costs) | | (16.0 | ) | | (43.4 | ) | | (30.6 | ) | | (27.4 | ) | | (63 | )% | | 12.8 |
| | 42 | % |
Operating costs, excluding noncash compensation adjustments | | (139.2 | ) | | (123.1 | ) | | (114.7 | ) | | 16.1 |
| | 13 | % | | 8.4 |
| | 7 | % |
Equity in net earnings from investments | | 90.8 |
| | 87.3 |
| | 74.4 |
| | 3.5 |
| | 4 | % | | 12.9 |
| | 17 | % |
Other | | (1.0 | ) | | (0.9 | ) | | 4.6 |
| | (0.1 | ) | | (11 | )% | | (5.5 | ) | | * |
|
Adjusted EBITDA | | $ | 366.3 |
| | $ | 339.8 |
| | $ | 313.1 |
| | $ | 26.5 |
| | 8 | % | | $ | 26.7 |
| | 9 | % |
Capital expenditures | | $ | 119.2 |
| | $ | 95.6 |
| | $ | 96.3 |
| | $ | 23.6 |
| | 25 | % | | $ | (0.7 | ) | | (1 | )% |
* Percentage change is greater than 100 percent.
See reconciliation of net income to adjusted EBITDA in the “Adjusted EBITDA” section.
As a result of the adoption of Topic 606, we record retained fuel charges as a reduction to cost of sales and fuel that would have been recorded as revenue prior to adoption and therefore the impact is offset between these line items.
2018 vs. 2017 - Adjusted EBITDA increased $26.5 million primarily as a result of the following:
an increase of $36.4 million from transportation services due primarily to increased interruptible volumes and firm transportation capacity contracted; and
an increase of $7.1 million in natural gas storage services due primarily to higher rates and capacity contracted; offset partially by
an increase of $16.1 million in operating costs due primarily to employee-related costs associated with labor and benefits and timing of routine maintenance projects.
Capital expenditures increased due primarily to timing of maintenance projects and our announced capital-growth projects.
2017 vs. 2016 - Adjusted EBITDA increased $26.7 million primarily as a result of the following:
an increase of $26.9 million from higher transportation services due primarily to increased firm transportation contracted capacity; and
an increase of $12.9 million in equity in net earnings from investments due primarily to higher firm transportation revenues on Roadrunner; offset partially by
an increase of $8.4 million in operating costs due primarily to routine maintenance projects and higher employee-related costs associated with labor and benefits; and
a decrease of $6.3 million due primarily to gains on sales of excess natural gas in storage in 2016.
|
| | | | | | | | | |
| | Years Ended December 31, |
Operating Information (a) | | 2018 | | 2017 | | 2016 |
Natural gas transportation capacity contracted (MDth/d) | | 6,846 |
| | 6,611 |
| | 6,345 |
|
Transportation capacity subscribed | | 96 | % | | 94 | % | | 92 | % |
(a) - Includes volumes for consolidated entities only.
Roadrunner, in which we have a 50 percent ownership interest, has contracted all of its westbound capacity through 2041. We made contributions of $65 million to Roadrunner in 2016. During the years ended December 31, 2018 and 2017, our contributions to Roadrunner were not material.
Northern Border Pipeline, in which we have a 50 percent ownership interest, has contracted substantially all of its long-haul transportation capacity through the fourth quarter 2020. We made contributions of $83 million to Northern Border Pipeline in 2017. During the years ended December 31, 2018 and 2016, we made no contributions to Northern Border Pipeline.
Northern Border Pipeline entered into a settlement with shippers that was approved by the FERC in February 2018. The settlement provides for tiered rate reductions beginning January 1, 2018, that will reduce rates 12.5 percent by January 2020, compared with previous rates, and requires new rates to be established by January 2024. We do not expect the impact of lower tariff rates on Northern Border Pipeline’s equity earnings and cash distributions to be material to us.
In compliance with the FERC final rule, Northern Border Pipeline completed the required filing related to the Tax Cuts and Jobs Act, and we do not expect the impact on tariff rates to be material to us.
In March 2018, the FERC initiated a review of Midwestern Gas Transmission Company’s rates pursuant to Section 5 of the Natural Gas Act. The parties reached agreement on the terms of a settlement that provides for an approximate 7 percent reduction in transportation rates. The revised rates became effective September 1, 2018, and the settlement agreement was approved by the FERC in January 2019. We do not expect the impact of the revised rates to be material to us.
Adjusted EBITDA
Adjusted EBITDA is a non-GAAP measuremeasures of our financial performance. Adjusted EBITDA is defined as net income adjusted for interest expense, depreciation and amortization, noncash impairment charges, income taxes, allowance for equity funds used during construction, noncash compensation expense and certain other noncash items. Prior periods have beenDistributable cash flow is defined as adjusted EBITDA, computed as described above, less interest expense, maintenance capital expenditures and equity earnings from investments, excluding noncash impairment charges, adjusted for net cash distributions received from unconsolidated affiliates and certain other items. Dividend coverage ratio is defined as distributable cash flow to conform to current presentation.common shareholders divided by the dividends paid in the period. We believe thisthese non-GAAP financial measure ismeasures are useful to investors because itthey and similar measures are used by many companies in our industry as a measurement of financial performance and isare commonly employed by financial analysts and others to evaluate our financial performance and to compare financial performance among companies in our industry. Adjusted EBITDA, distributable cash flow and dividend coverage ratio should not be considered an alternativealternatives to net income, earnings per unitEPS or any other measure of financial performance presented in accordance with GAAP. Additionally, this calculationthese calculations may not be comparable with similarly titled measures of other companies.
Consolidated Operations
Selected Financial Results - The following table sets forth certain selected consolidated financial results for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, | | 2020 vs. 2019 | | 2019 vs. 2018 |
Financial Results | | 2020 | | 2019 | | 2018 | | $ Increase (Decrease) |
| | (Millions of dollars, except per share amounts) |
Revenues | | | | | | | | | | |
Commodity sales | | $ | 7,255.2 | | | $ | 8,916.1 | | | $ | 11,395.6 | | | (1,660.9) | | | (2,479.5) | |
Services | | 1,287.0 | | | 1,248.3 | | | 1,197.6 | | | 38.7 | | | 50.7 | |
Total revenues | | 8,542.2 | | | 10,164.4 | | | 12,593.2 | | | (1,622.2) | | | (2,428.8) | |
Cost of sales and fuel (exclusive of items shown separately below) | | 5,110.1 | | | 6,788.0 | | | 9,422.7 | | | (1,677.9) | | | (2,634.7) | |
Operating costs | | 886.1 | | | 982.9 | | | 907.0 | | | (96.8) | | | 75.9 | |
Depreciation and amortization | | 578.7 | | | 476.5 | | | 428.6 | | | 102.2 | | | 47.9 | |
Impairment charges | | 607.2 | | | — | | | — | | | 607.2 | | | — | |
(Gain) loss on sale of assets | | (1.3) | | | 2.6 | | | (0.6) | | | 3.9 | | | (3.2) | |
Operating income | | $ | 1,361.4 | | | $ | 1,914.4 | | | $ | 1,835.5 | | | (553.0) | | | 78.9 | |
Equity in net earnings from investments | | $ | 143.2 | | | $ | 154.5 | | | $ | 158.4 | | | (11.3) | | | (3.9) | |
Impairment of equity investments | | $ | (37.7) | | | $ | — | | | $ | — | | | 37.7 | | | — | |
Interest expense, net of capitalized interest | | $ | (712.9) | | | $ | (491.8) | | | $ | (469.6) | | | 221.1 | | | 22.2 | |
Net income | | $ | 612.8 | | | $ | 1,278.6 | | | $ | 1,155.0 | | | (665.8) | | | 123.6 | |
Diluted EPS | | $ | 1.42 | | | $ | 3.07 | | | $ | 2.78 | | | (1.65) | | | 0.29 | |
Adjusted EBITDA | | $ | 2,723.7 | | | $ | 2,580.2 | | | $ | 2,447.5 | | | 143.5 | | | 132.7 | |
Distributable cash flow | | $ | 1,881.6 | | | $ | 2,016.1 | | | $ | 1,822.4 | | | (134.5) | | | 193.7 | |
Capital expenditures | | $ | 2,195.4 | | | $ | 3,848.3 | | | $ | 2,141.5 | | | (1,652.9) | | | 1,706.8 | |
See reconciliation of net income to adjusted EBITDA and distributable cash flow in the “Non-GAAP Measures” section.
Changes in commodity prices and sales volumes affect both revenues and cost of sales and fuel in our Consolidated Statements of Income, and, therefore, the impact is largely offset between these line items.
2020 vs. 2019 - Operating income decreased $553.0 million primarily as a result of the following:
•a decrease of $607.2 million due to noncash impairment charges in our Natural Gas Gathering and Processing and Natural Gas Liquids segments;
•an increase of $102.2 million in depreciation expense due to capital projects placed in service;
•Natural Gas Gathering and Processing - a decrease of $47.6 million due primarily to lower realized prices and a decrease of $42.6 million due primarily to natural production declines in the Mid-Continent region; offset partially by
•Natural Gas Liquids - an increase of $270.6 million in exchange services due primarily to higher volumes in the Rocky Mountain region and Permian Basin and lower rail and pipeline transportation costs, offset partially by a decrease of $123.5 million in optimization and marketing due primarily to narrower location price differentials, lower optimization volumes and lower marketing earnings;
•a decrease of $96.8 million in operating costs due primarily to reduced outside services, lower materials and supplies expenses, lower employee-related costs and the noncash mark-to-market impact of our share-based deferred compensation plan; and
•Natural Gas Pipelines - an increase of $6.7 million in transportation services due primarily to higher firm transportation revenue and a $13.5 million contract settlement, offset partially by lower interruptible revenue.
Net income and diluted EPS decreased due primarily to the items discussed above and higher interest expense related to an increase in our debt balance and lower capitalized interest and noncash impairment charges related to equity investments in our Natural Gas Gathering and Processing and Natural Gas Liquids segments, offset partially by net gains on extinguishment of debt related to open market repurchases. Diluted EPS was also impacted by our equity issuance in June 2020.
Capital expenditures decreased due primarily to our previously completed capital-growth projects as well as our paused and suspended capital-growth projects related to weakened commodity prices and economic disruption caused by COVID-19.
Additional information regarding our financial results and operating information is provided in the discussions for each of our segments and in Non-GAAP Measures.
Selected Financial Results and Operating Information for the Year Ended December 31, 2019 vs. 2018 - The consolidated and segment financial results and operating information for the year ended December 31, 2019, compared with the year ended December 31, 2018, are included in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations of our 2019 Annual Report on Form 10-K, which is available via the SEC’s website at www.sec.gov and our website at www.oneok.com.
Natural Gas Gathering and Processing
Growth Projects - Our Natural Gas Gathering and Processing segment has invested in growth projects in NGL-rich areas in the Williston Basin. See “Growth Projects” in the “Recent Developments” section for discussion of our capital-growth projects.
See “Capital Expenditures” in “Liquidity and Capital Resources” for additional detail of our projected capital expenditures.
Selected Financial Results and Operating Information - The following tables set forth certain selected financial results and operating information for our Natural Gas Gathering and Processing segment for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, | | 2020 vs. 2019 | | 2019 vs. 2018 |
Financial Results | | 2020 | | 2019 | | 2018 | | $ Increase (Decrease) |
| | (Millions of dollars) |
NGL sales | | $ | 775.9 | | | $ | 1,024.3 | | | $ | 1,567.2 | | | (248.4) | | | (542.9) | |
Condensate sales | | 113.5 | | | 200.1 | | | 208.8 | | | (86.6) | | | (8.7) | |
Residue natural gas sales | | 771.5 | | | 966.1 | | | 1,084.2 | | | (194.6) | | | (118.1) | |
Gathering, compression, dehydration and processing fees and other revenue | | 159.2 | | | 178.1 | | | 174.4 | | | (18.9) | | | 3.7 | |
Cost of sales and fuel (exclusive of depreciation and operating costs) | | (844.0) | | | (1,302.3) | | | (2,041.4) | | | (458.3) | | | (739.1) | |
Operating costs, excluding noncash compensation adjustments | | (320.0) | | | (352.8) | | | (357.7) | | | (32.8) | | | (4.9) | |
Equity in net earnings (loss) from investments | | (1.1) | | | (6.3) | | | 0.4 | | | 5.2 | | | (6.7) | |
Other | | (5.0) | | | (4.5) | | | (4.3) | | | (0.5) | | | (0.2) | |
Adjusted EBITDA | | $ | 650.0 | | | $ | 702.7 | | | $ | 631.6 | | | (52.7) | | | 71.1 | |
Impairment charges | | $ | 566.1 | | | $ | — | | | $ | — | | | 566.1 | | | — | |
Capital expenditures | | $ | 446.1 | | | $ | 926.5 | | | $ | 694.6 | | | (480.4) | | | 231.9 | |
| | | | | | | | | | |
See reconciliation of net income to adjusted EBITDA in the “Non-GAAP Measures” section.
Changes in commodity prices and sales volumes affect both revenue and cost of sales and fuel, and, therefore, the impact is largely offset between these line items.
2020 vs. 2019 - Adjusted EBITDA decreased $52.7 million, primarily as a result of the following:
•a decrease of $47.6 million due primarily to lower realized prices impacting our fee with POP contracts; and
•a decrease of $42.6 million due primarily to natural production declines in the Mid-Continent region; offset partially by
•a decrease of $32.8 million in operating costs due primarily to lower materials and supplies expenses due to reduced asset utilization, lower employee-related costs and outside services.
The year ended December 31, 2020, includes $382.2 million of noncash impairment charges related primarily to certain long-lived asset groups in the Powder River Basin, western Oklahoma and Kansas that were not recoverable, a $153.4 million noncash impairment charge related to goodwill and a $30.5 million noncash impairment charge related to our 10.2% investment in Venice Energy Services Company. For additional information on our impairment charges, see Notes A, D, E and M of the Notes to Consolidated Financial Statements in this Annual Report.
Capital expenditures decreased due primarily to capital-growth projects completed in 2019 and early 2020, as well as several paused capital-growth projects in 2020.
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
Operating Information (a) | | 2020 | | 2019 | | 2018 |
Natural gas gathered (BBtu/d) | | 2,553 | | | 2,753 | | | 2,546 | |
Natural gas processed (BBtu/d) (b) | | 2,364 | | | 2,555 | | | 2,382 | |
| | | | | | |
| | | | | | |
Average fee rate ($/MMBtu) | | $ | 0.89 | | | $ | 0.92 | | | $ | 0.90 | |
(a) - Includes volumes for consolidated entities only.
(b) - Includes volumes at company-owned and third-party facilities.
2020 vs. 2019 - Our natural gas gathered and natural gas processed volumes decreased due primarily to natural production declines in the Mid-Continent region. In the Williston Basin, we saw significant declines in volumes in the second quarter 2020 due to production curtailments from some of our crude oil and natural gas producers. By the end of the third quarter 2020, curtailed volumes returned.
Our average fee rate decreased due primarily to production curtailments in the second quarter 2020 on producer contracts with higher fees and lower POP components in the Williston Basin. As these curtailed volumes returned to our system, the Williston Basin’s contribution to our average fee rate increased in the second half of 2020.
Commodity Price Risk - See discussion regarding our commodity price risk under “Commodity Price Risk” in Item 7A, Quantitative and Qualitative Disclosures about Market Risk.
Natural Gas Liquids
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 and refining industries and NGL export demand in the Gulf Coast. See “Growth Projects” in the “Recent Developments” section for discussion of our capital-growth projects.
In 2020, we connected two third-party natural gas processing plants in the Permian Basin and two third-party natural gas processing plants in the Rocky Mountain region to our NGL system. In addition, one affiliate and two third-party natural gas processing plants in the Rocky Mountain region and one third-party natural gas processing plant in the Mid-Continent region connected to our system were expanded.
For a discussion of our capital expenditure financing, see “Capital Expenditures” in the “Liquidity and Capital Resources” section.
Selected Financial Results and Operating Information -The following tables set forth certain selected financial results and operating information for our Natural Gas Liquids segment for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, | | 2020 vs. 2019 | | 2019 vs. 2018 |
Financial Results | | 2020 | | 2019 | | 2018 | | $ Increase (Decrease) |
| | (Millions of dollars) |
NGL and condensate sales | | $ | 6,409.3 | | | $ | 7,910.8 | | | $ | 10,319.9 | | | (1,501.5) | | | (2,409.1) | |
Exchange service revenues and other | | 497.8 | | | 424.2 | | | 415.7 | | | 73.6 | | | 8.5 | |
Transportation and storage revenues | | 182.9 | | | 197.5 | | | 199.0 | | | (14.6) | | | (1.5) | |
Cost of sales and fuel (exclusive of depreciation and operating costs) | | (5,108.6) | | | (6,690.9) | | | (9,176.8) | | | (1,582.3) | | | (2,485.9) | |
Operating costs, excluding noncash compensation adjustments | | (396.4) | | | (434.4) | | | (378.3) | | | (38.0) | | | 56.1 | |
Equity in net earnings from investments | | 39.9 | | | 65.1 | | | 67.1 | | | (25.2) | | | (2.0) | |
Other | | (7.7) | | | (6.5) | | | (6.0) | | | (1.2) | | | (0.5) | |
Adjusted EBITDA | | $ | 1,617.2 | | | $ | 1,465.8 | | | $ | 1,440.6 | | | 151.4 | | | 25.2 | |
Impairment charges | | $ | 78.8 | | | $ | — | | | $ | — | | | 78.8 | | | — | |
Capital expenditures | | $ | 1,655.8 | | | $ | 2,796.6 | | | $ | 1,306.3 | | | (1,140.8) | | | 1,490.3 | |
See reconciliation of net income to adjusted EBITDA in the “Non-GAAP Measures” section.
Changes in commodity prices and sales volumes affect both revenues and cost of sales and fuel, and, therefore, the impact is largely offset between these line items.
2020 vs. 2019 - Adjusted EBITDA increased $151.4 million, primarily as a result of the following:
•an increase of $270.6 million in exchange services due primarily to $137.8 million in higher volumes in the Rocky Mountain region and Permian Basin, $128.4 million in lower costs due primarily to lower rail and pipeline transportation costs, $18.8 million in higher fees charged to customers with minimum volume obligations primarily in the Rocky Mountain region, $17.2 million in higher average fee rates primarily in the Permian Basin and $13.7 million related to lower unfractionated NGLs held in inventory, offset partially by $34.2 million in lower volumes in the Mid-Continent region; and
•a decrease of $38.0 million in operating costs due primarily to lower outside services and employee-related costs; offset partially by
•a decrease of $123.5 million in optimization and marketing due primarily to a decrease of $78.2 million related to narrower location price differentials and lower optimization volumes, lower marketing earnings of $53.0 million due to lower earnings from purity NGL inventory sales and changes in the value of NGLs held in inventory; and
•a decrease of $25.2 million from lower equity in net earnings from investments due primarily to lower volumes on Overland Pass Pipeline.
The year ended December 31, 2020, includes $71.6 million of noncash impairment charges related primarily to certain inactive assets and a $7.2 million noncash impairment charge related to our 50% investment in Chisholm Pipeline Company. For additional information on our impairment charges, see Notes A, D and M of the Notes to Consolidated Financial Statements in this Annual Report.
Capital expenditures decreased due primarily to completed and paused capital-growth projects.
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
Operating Information | | 2020 | | 2019 | | 2018 |
| | | | | | |
Raw feed throughput (MBbl/d) (a) | | 1,084 | | | 1,079 | | | 1,010 | |
Average Conway-to-Mont Belvieu OPIS price differential - ethane in ethane/propane mix ($/gallon) | | $ | 0.01 | | | $ | 0.07 | | | $ | 0.15 | |
(a) - Represents physical raw feed volumes on which we charge a fee for transportation and/or fractionation services.
2020 vs. 2019 - Volumes increased due primarily to increased production at new and existing processing plants in the Rocky Mountain region and Permian Basin, offset partially by lower volumes in the Mid-Continent region and the unfavorable impact from producer curtailments primarily in the second quarter 2020.
Natural Gas Pipelines
Selected Financial Results and Operating Information -The following tables set forth certain selected financial results and operating information for our Natural Gas Pipelines segment for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
| | Years Ended December 31, | | 2020 vs. 2019 | | 2019 vs. 2018 |
Financial Results | | 2020 | | 2019 | | 2018 | | $ Increase (Decrease) |
| | (Millions of dollars) |
Transportation revenues | | $ | 401.7 | | | $ | 393.7 | | | $ | 343.0 | | | 8.0 | | | 50.7 | |
Storage revenues | | 68.4 | | | 72.6 | | | 72.0 | | | (4.2) | | | 0.6 | |
Residue natural gas sales and other revenues | | 9.9 | | | 5.7 | | | 16.7 | | | 4.2 | | | (11.0) | |
Cost of sales and fuel (exclusive of depreciation and operating costs) | | (6.8) | | | (4.6) | | | (16.0) | | | 2.2 | | | (11.4) | |
Operating costs, excluding noncash compensation adjustments | | (137.2) | | | (150.8) | | | (139.2) | | | (13.6) | | | 11.6 | |
Equity in net earnings from investments | | 104.4 | | | 95.7 | | | 90.8 | | | 8.7 | | | 4.9 | |
Other | | (3.0) | | | (3.5) | | | (1.0) | | | 0.5 | | | (2.5) | |
Adjusted EBITDA | | $ | 437.4 | | | $ | 408.8 | | | $ | 366.3 | | | 28.6 | | | 42.5 | |
Capital expenditures | | $ | 71.9 | | | $ | 99.2 | | | $ | 119.2 | | | (27.3) | | | (20.0) | |
See reconciliation of net income to adjusted EBITDA in the “Non-GAAP Measures” section.
2020 vs. 2019 - Adjusted EBITDA increased $28.6 million primarily as a result of the following:
•a decrease of $13.6 million in operating costs due primarily to lower employee-related costs and materials and supplies expenses;
•an increase of $8.7 million from higher equity in net earnings from investments due primarily to additional firm transportation capacity contracted on Northern Border;
•an increase of $6.7 million in transportation services due primarily to higher firm transportation revenue and a $13.5 million contract settlement, offset partially by lower interruptible revenue; and
•an increase of $4.0 million from higher net retained fuel and timing of equity gas sales; offset partially by
•a decrease of $3.9 million from storage services due primarily to lower park-and-loan activity.
Capital expenditures decreased due primarily to the completion of our expansion projects in 2019.
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
Operating Information (a) | | 2020 | | 2019 | | 2018 |
Natural gas transportation capacity contracted (MDth/d) | | 7,461 | | | 7,618 | | | 6,846 | |
Transportation capacity contracted | | 96 | % | | 98 | % | | 96 | % |
(a) - Includes volumes for consolidated entities only.
2020 vs. 2019 - Natural gas transportation capacity contracted decreased due to a contract settlement and the impact of market conditions.
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 2021.
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 (Settlement) with the FERC for approval. The FERC accepted the Settlement in July 2020, which did not impact materially our results of operations.
NON-GAAP MEASURES
The following table sets forth a reconciliation of net income, the nearest comparable GAAP financial performance measure, to adjusted EBITDA, distributable cash flow and dividend coverage for the periods indicated:
|
| | | | | | | | | | | | |
| | Years Ended December 31, |
(Unaudited) | | 2018 | | 2017 | | 2016 |
Reconciliation of net income to adjusted EBITDA | | (Thousands of dollars) |
Net income | | $ | 1,155,032 |
| | $ | 593,519 |
| | $ | 743,499 |
|
Add: | | | | | | |
Interest expense, net of capitalized interest | | 469,620 |
| | 485,658 |
| | 469,651 |
|
Depreciation and amortization | | 428,557 |
| | 406,335 |
| | 391,585 |
|
Income taxes | | 362,903 |
| | 447,282 |
| | 212,406 |
|
Impairment charges | | — |
| | 20,240 |
| | — |
|
Noncash compensation expense | | 37,954 |
| | 13,421 |
| | 31,981 |
|
Other noncash items and equity AFUDC (a) | | (6,545 | ) | | 20,398 |
| | 796 |
|
Adjusted EBITDA | | $ | 2,447,521 |
| | $ | 1,986,853 |
| | $ | 1,849,918 |
|
Reconciliation of segment adjusted EBITDA to adjusted EBITDA | | | | | | |
Segment adjusted EBITDA: | | | | | | |
Natural Gas Gathering and Processing | | $ | 631,607 |
| | $ | 518,472 |
| | $ | 446,778 |
|
Natural Gas Liquids | | 1,440,605 |
| | 1,154,939 |
| | 1,079,619 |
|
Natural Gas Pipelines | | 366,251 |
| | 339,818 |
| | 313,137 |
|
Other (b) | | 9,058 |
| | (26,376 | ) | | 10,384 |
|
Adjusted EBITDA | | $ | 2,447,521 |
| | $ | 1,986,853 |
| | $ | 1,849,918 |
|
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
(Unaudited) | | 2020 | | 2019 | | 2018 |
Reconciliation of net income to adjusted EBITDA, distributable cash flow and dividend coverage | | (Thousands of dollars, except per share amounts and coverage ratios) |
Net income | | $ | 612,809 | | | $ | 1,278,577 | | | $ | 1,155,032 | |
Add: | | | | | | |
Interest expense, net of capitalized interest | | 712,886 | | | 491,773 | | | 469,620 | |
Depreciation and amortization | | 578,662 | | | 476,535 | | | 428,557 | |
Income tax expense | | 189,507 | | | 372,414 | | | 362,903 | |
Impairment charges | | 644,930 | | | — | | | — | |
Noncash compensation expense (a) | | 8,540 | | | 26,699 | | | 37,954 | |
Equity AFUDC and other noncash items | | (23,661) | | | (65,811) | | | (6,545) | |
Adjusted EBITDA (b) | | 2,723,673 | | | 2,580,187 | | | 2,447,521 | |
Interest expense, net of capitalized interest | | (712,886) | | | (491,773) | | | (469,620) | |
Maintenance capital | | (136,920) | | | (195,631) | | | (188,420) | |
Equity in net earnings from investments | | (143,241) | | | (154,541) | | | (158,383) | |
Distributions received from unconsolidated affiliates | | 176,160 | | | 257,644 | | | 197,285 | |
Other (b) | | (25,195) | | | 20,227 | | | (5,994) | |
Distributable cash flow | | 1,881,591 | | | 2,016,113 | | | 1,822,389 | |
Dividends paid to preferred shareholders | | (1,100) | | | (1,100) | | | (1,100) | |
Distributable cash flow to shareholders | | 1,880,491 | | | 2,015,013 | | | 1,821,289 | |
Dividends paid | | (1,604,266) | | | (1,456,528) | | | (1,333,958) | |
Distributable cash flow in excess of dividends paid | | $ | 276,225 | | | $ | 558,485 | | | $ | 487,331 | |
Dividends paid per share | | $ | 3.74 | | | $ | 3.53 | | | $ | 3.245 | |
Dividend coverage ratio | | 1.17 | | | 1.38 | | | 1.37 | |
Number of shares used in computation (thousands) | | 428,948 | | | 412,614 | | | 411,081 | |
(a) - Year ended December 31, 2017,2020, includes our April 2017 contributiona benefit of $11.2 million related to the Foundationmark-to-market of 20,000 shares of Series E Preferred Stock, with an aggregate value of $20.0 million.our share-based deferred compensation plan.
(b) - Year ended December 31, 2017,2020, includes Merger Transaction costsnet gains of $30.0 million.$22.3 million on extinguishment of debt related to open market repurchases.
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
(Unaudited) | | 2020 | | 2019 | | 2018 |
Reconciliation of segment adjusted EBITDA to adjusted EBITDA | | (Thousands of dollars) |
Segment adjusted EBITDA: | | | | | | |
Natural Gas Gathering and Processing | | $ | 650,036 | | | $ | 702,650 | | | $ | 631,607 | |
Natural Gas Liquids | | 1,617,241 | | | 1,465,765 | | | 1,440,605 | |
Natural Gas Pipelines | | 437,426 | | | 408,816 | | | 366,251 | |
Other (a) | | 18,970 | | | 2,956 | | | 9,058 | |
Adjusted EBITDA | | $ | 2,723,673 | | | $ | 2,580,187 | | | $ | 2,447,521 | |
(a) - Year ended December 31, 2020, includes corporate net gains of $22.3 million on extinguishment of debt related to open market repurchases.
CONTINGENCIES
See Note N of the Notes to Consolidated Financial Statements in this Annual Report for a discussion of regulatory matters and developments concerning the Gas Index Pricing Litigation.matters.
Other Legal Proceedings -We are a party to various litigation matters and claims that have arisen in the normal course of our operations. While the results of these litigation matters and claims cannot be predicted with certainty, we believe the reasonably possible losses from such matters, individually and in the aggregate, are not material. Additionally, we believe the probable final outcome of such matters will not have a material adverse effect on our consolidated results of operations, financial position or cash flows.
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 in 2021 to be primarily related to i) capital expenditures, ii) interest and repayment of debt maturities and iii) dividends paid to shareholders. We expect our cash outflows related toshareholders and capital expenditures and dividends paid to increase due to our announced capital-growth projects and higher anticipated dividends per share, subject to board of directors’ approval.expenditures.
We expect our sources of cash inflowinflows to provide sufficient resources to finance our operations capital expenditures and quarterly cash dividends, including expected future dividend increases. Ourdividends. We believe we have sufficient liquidity due to our $2.5 Billion Credit Agreement, and the remaining $950 million available to be drawnwhich expires in June 2024, cash on hand from our $1.5 Billion Term Loan Agreement provide significant liquidity to fund capital expendituresJune 2020 equity issuance and repay existing indebtedness. We may access the capital markets to issue debt or equity securities as we consider prudent to provide additional liquidity to refinance existing debt, improve credit metrics or to fund capital expenditures. Although we expect to continue to fund capital projects primarily with cash from operations, short-term borrowings and long-term debt, we continue to have access to $550 million$1.0 billion available through our “at-the-market” equity program. With $1.6 billion of equity issued in 2017 and January 2018, we have satisfied our expected equity financing needs for our announced capital-growth projects.
We manage interest-rate risk through the use of fixed-rate debt, floating-rate debt and interest-rate swaps and treasury lock contracts.swaps. For additional information on our interest-rate swaps, see Note C of the Notes to Consolidated Financial Statements in this Annual 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 financial information. The Intermediate Partnership holds all of ONEOK Partners’ interests and equity in its subsidiaries, which are non-guarantors, and substantially all the assets and operations reside with non-guarantor operating subsidiaries. Therefore, as allowed under Rule 13-01, we have excluded the summarized financial information for each issuer and guarantor as the combined financial information of the subsidiary issuer and parent guarantor, excluding our ownership of all the interests in ONEOK Partners, reflect no material assets, liabilities or results of operations, apart from the guaranteed indebtedness. For additional information on our and ONEOK Partners’ indebtedness, see Note F of the Notes to Consolidated Financial Statements in this Annual Report.
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 December 31, 2020, we are in compliance with all covenants of our $2.5 Billion Credit Agreement.
At December 31, 2020, we had no borrowings under our $2.5 Billion Credit Agreement and the remaining $950 million available to be drawn on our $1.5 Billion Term Loan Agreement. As of December 31, 2018, we were in compliance with all covenants of the $2.5 Billion Credit Agreement and the $1.5 Billion Term Loan Agreement.
At December 31, 2018, we had $12.0$524.5 million of cash and cash equivalents and $2.5 billion of borrowing capacity under the $2.5 Billion Credit Agreement.equivalents.
We had a working capital (defined as current assets less current liabilities) deficitssurplus of $709.8$525.2 million and $902.9a working capital deficit of $550.0 million as of December 31, 2018,2020, and December 31, 2017,2019, respectively. Although working capital is influenced by several factors, including, among other things: (i) the timing of (a) debt and equity issuances, (b) the funding of capital expenditures, (c) scheduled debt payments, (b) the collection and payment of(d) accounts receivable and payable, and (c) equity and debt issuances,payable; and (ii) the volume and cost of inventory and commodity imbalances,imbalances; our working capital surplus at December 31, 2020, was driven primarily by cash on hand and our working capital deficit at December 31, 2018,2019, was driven primarily by current maturities of long-term debt, with December 31, 2017, also impacted by short-term borrowings.borrowings and accrued interest. We may have working capital deficits in future periods as we continue to repay long-term debt and finance our capital-growth projects, and repay long-term debt, often initially with short-term borrowings. We do not expect this working capital deficit to have an adverse impact to our cash flows or operations.
For additional information on our $2.5 Billion Credit Agreement, and commercial paper program, see Note F of the Notes to Consolidated Financial Statements in this Annual 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 and Upcoming Maturities - In November 2018, we entered into the $1.5 Billion Term Loan Agreement with a syndicate of banks, which is available to be drawn until May 2019. The $1.5 Billion Term Loan Agreement matures in November 2021 and bears interest at LIBOR plus 112.5 basis points based on our current credit ratings. The agreement contains an option, which may be exercised up to two times, to extend the term of the loan, in each case, for an additional one-year term subject to approval of the banks. The $1.5 Billion Term Loan Agreement allows prepayment of all or any portion outstanding, without penalty or premium, and contains substantially the same covenants as those contained in the $2.5 Billion Credit Agreement. As of December 31, 2018, we had borrowings totaling $550 million outstanding under the $1.5 Billion Term Loan Agreement, which were used for general corporate purposes, including repayment of existing indebtedness.
In July 2018,2020, we completed an underwritten public offering of $1.25$1.5 billion senior unsecured notes consisting of $800$600 million, 4.55 percent5.85% senior notes due 2028, and $4502026; $600 million, 5.2 percent6.35% senior notes due 2048.2031; and $300 million, 7.15% senior notes due 2051. The net proceeds, after deducting underwriting discounts, commissions and offering expenses, were $1.23$1.48 billion. A portion of the proceeds was used to repay the outstanding borrowings under our $1.5 Billion Term Loan Agreement. The remainder was used for general corporate purposes.
In 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 was used to pay all outstanding amounts under our commercial paper program. The remainder was used for general corporate purposes, which included repayment of other existing indebtedness and funding capital expenditures.
We expect to repayDebt Repayments - In May 2020, we repaid the $500 million, 8.625 percent senior notes due in March 2019,remaining $1.25 billion of our $1.5 Billion Term Loan Agreement with a combination of cash on hand and/or short- or long-term borrowings.from our May 2020 public offering of $1.5 billion senior unsecured notes.
Debt Repayments - In August 2018,2020, we repaidrepurchased in the $425 million, 3.2 percentopen market outstanding principal of certain of our senior notes due September 2018in the amount of $224.4 million for an aggregate repurchase price of $199.6 million with cash on hand. In January 2018connection with these open market repurchases, we repaid the remaining $500recognized $22.3 million balance outstandingof net gains on the ONEOK Partners Term Loan Agreement due 2019 with a combinationextinguishment of cash on hand and short-term borrowings.debt.
For additional information on our long-term debt, see Note F of the Notes to Consolidated Financial Statements in this Annual Report.
Equity Issuances - In January 2018, we completed an underwritten public offering of 21.9 million shares of our common stock at a public offering price of $54.50 per share, generating net proceeds of $1.2 billion. We used the net proceeds from this offering to fund capital expenditures and for general corporate purposes, which included repaying a portion of our outstanding indebtedness.
In July 2017,2020, we established an “at-the-market” equity program for the offer and sale from time to time of our common stock up to an aggregate amountoffering price of $1$1.0 billion. The program allows us to offer and sell our common stock at prices we deem appropriate through a sales agent.agent, in forward sales transactions through a forward seller or directly to one or more of the program’s managers acting as principals. Sales of our common stock may be made by means of ordinary brokers’ transactions on the NYSE, in block transactions or as otherwise agreed to between us and the sales agent. We are under no obligation to offer and sell common stock under the program. During the year ended December 31, 2017, we sold 8.4 millionNo shares of common stock through our “at-the-market” equity program that resulted in net proceeds of $448.3 million. During the year ended December 31, 2018, no shares werehave been sold through our “at-the-market” equity program.program as of the date of this report.
In June 2020, we completed an underwritten public offering of 29.9 million shares of our common stock at a public offering price of $32.00 per share, generating net proceeds, after deducting underwriting discounts, commissions and offering expenses, of $937.0 million. A portion of the proceeds was, and we anticipate the remainder will be, used for general corporate purposes, including repayment of existing indebtedness and funding capital expenditures.
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 and the issuance of equity.debt.
The following table sets forth our growth and maintenance capital expenditures, excluding AFUDC and capitalized interest, for the periods indicated:
| | | | | | | | | | | | | | | | | | | | |
Capital Expenditures | | 2020 | | 2019 | | 2018 |
| | (Millions of dollars) |
Natural Gas Gathering and Processing | | $ | 446.1 | | | $ | 926.5 | | | $ | 694.6 | |
Natural Gas Liquids | | 1,655.8 | | | 2,796.6 | | | 1,306.3 | |
Natural Gas Pipelines | | 71.9 | | | 99.2 | | | 119.2 | |
Other | | 21.6 | | | 26.0 | | | 21.4 | |
Total capital expenditures | | $ | 2,195.4 | | | $ | 3,848.3 | | | $ | 2,141.5 | |
|
| | | | | | | | | | | | |
Capital Expenditures | | 2018 | | 2017 | | 2016 |
| | (Millions of dollars) |
Natural Gas Gathering and Processing | | $ | 694.6 |
| | $ | 284.2 |
| | $ | 410.5 |
|
Natural Gas Liquids | | 1,306.3 |
| | 114.3 |
| | 105.9 |
|
Natural Gas Pipelines | | 119.2 |
| | 95.6 |
| | 96.3 |
|
Other | | 21.4 |
| | 18.3 |
| | 11.9 |
|
Total capital expenditures | | $ | 2,141.5 |
| | $ | 512.4 |
| | $ | 624.6 |
|
Capital expenditures increased in 2018, compared with 2017, due primarily to capital-growth projects in progress. Capital expenditures decreased in 2017,2020, compared with 2016,2019, due primarily to the completion of several largeour previously completed capital-growth projects, as well as our paused and suspended capital-growth projects. We expect our 2019 projected2021 capital expenditures to increase decrease
relative to 20182020 due to our announcedpreviously completed capital-growth projects.projects and paused and suspended capital-growth projects, unless producer activity levels warrant additional infrastructure. See discussion of our announced capital-growth projects in the “Recent Developments” section.
The following table summarizes our 2019 projected growth and maintenanceWe expect total capital expenditures, excluding AFUDC and capitalized interest:interest, of $525-$675 million in 2021.
|
| | |
2019 Projected Capital Expenditures |
| | (Millions of dollars)
|
Growth | | $2,500-$3,700 |
Maintenance | | $160-$200 |
Total projected capital expenditures | | $2,660-$3,900 |
Credit Ratings - Our long-term debt credit ratings as of February 19, 2019,16, 2021, are shown in the table below:
|
| | | | | | | | | | |
Rating Agency | Long-Term Rating | Short-Term Rating | Outlook |
Moody’s | Baa3 | Prime-3 | Stable |
S&P | BBB | A-2 | Stable |
Fitch (a) | BBB | F2 | Stable |
(a) - Fitch assigned first-time ratings to ONEOK in November 2020. | |
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 remained stable. 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 theour $2.5 Billion Credit Agreement and $1.5 Billion Term Loan Agreement wouldcould 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 $1.5 Billion Term Loan Agreement until fully drawn or through May 2019, as well as our $2.5 Billion Credit Agreement, which expires in 2023.2024. An adverse credit rating change alone is not a default under our $2.5 Billion Credit Agreement or our $1.5 Billion Term Loan Agreement. We do not expect a downgrade in our credit rating to have a material impact on our results of operations.
In the normal course of business, our counterparties provide us with secured and unsecured credit. In the event of a downgrade in our credit ratings or a significant change in our counterparties’ evaluation of our creditworthiness, we could be required to provide additional collateral in the form of cash, letters of credit or other negotiable instruments as a condition of continuing to 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 boardBoard of directors,Directors, subject to the rights of the holders of outstanding preferred stock. In 2018,2020, we paid dividends of $3.245$3.74 per share, an increase of 19 percent6% compared with the prior year. In February 2019,2021, we maintained and paid a quarterly dividend of $0.86$0.935 per share ($3.443.74 per share on an annualized basis), an increase of 12 percent comparedwhich is consistent with the same quarter in the prior year.
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 percent5.5% per year. In 2018,2020, we paid dividends of $1.1 million for the Series E Preferred Stock. In February 2019,2021, we paid quarterly dividends totaling $0.3 million for the Series E Preferred Stock.
For the yearsyear ended December 31, 2018 and 2017,2020, our cash flows from operations exceeded cash dividends paid by $866.1 million and $486.0 million, respectively.$293.7 million. We expect our cash flows from operations to continue to sufficiently fund our cash dividends.
To the extent operating cash flows are not sufficient to fund our dividends, we may utilize cash on hand from other sources of short- and long-term debt and issuancesliquidity to fund a portion of equity, as necessary or appropriate.our dividends.
CASH FLOW ANALYSIS
We use the indirect method to prepare our Consolidated Statements of Cash Flows. Under this method, we reconcile net income to cash flows provided by operating activities by adjusting net income for those items that affect net income but do not result in actual cash receipts or payments during the period and for operating cash items that do not impact net income. These reconciling items can include depreciation and amortization, impairment charges, allowance for equity funds used during construction, gain or loss on sale of assets, deferred income taxes, net undistributed earnings from equity-method investments, share-based compensation expense, other amounts and changes in our assets and liabilities not classified as investing or financing activities.
The following table sets forth the changes in cash flows by operating, investing and financing activities for the periods indicated:
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2020 | | 2019 | | 2018 |
| | (Millions of dollars) |
Total cash provided by (used in): | | | | | | |
Operating activities | | $ | 1,899.0 | | | $ | 1,946.8 | | | $ | 2,186.7 | |
Investing activities | | (2,270.5) | | | (3,768.8) | | | (2,114.9) | |
Financing activities | | 875.0 | | | 1,831.0 | | | (97.0) | |
Change in cash and cash equivalents | | 503.5 | | | 9.0 | | | (25.2) | |
Cash and cash equivalents at beginning of period | | 21.0 | | | 12.0 | | | 37.2 | |
Cash and cash equivalents at end of period | | $ | 524.5 | | | $ | 21.0 | | | $ | 12.0 | |
|
| | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| | (Millions of dollars) |
Total cash provided by (used in): | | | | | | |
Operating activities | | $ | 2,186.7 |
| | $ | 1,315.4 |
| | $ | 1,353.2 |
|
Investing activities | | (2,114.9 | ) | | (567.6 | ) | | (615.4 | ) |
Financing activities | | (97.0 | ) | | (959.5 | ) | | (586.5 | ) |
Change in cash and cash equivalents | | (25.2 | ) | | (211.7 | ) | | 151.3 |
|
Cash and cash equivalents at beginning of period | | 37.2 |
| | 248.9 |
| | 97.6 |
|
Cash and cash equivalents at end of period | | $ | 12.0 |
| | $ | 37.2 |
| | $ | 248.9 |
|
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 and NGL inventory balances, which are driven primarily by commodity prices, supply, demand and the operation of our assets.
20182020 vs. 20172019 - Cash flows from operating activities, before changes in operating assets and liabilities, increased to $2.0 billion for 2018, compared with $1.5 billion for 2017. This increase isdecreased $51.1 million due primarily to higher earnings resulting from volume growth in the Williston Basin and STACK and SCOOP areasinterest expense, lower realized prices in our Natural Gas Gathering and Processing segment and Natural Gas Liquids segments and higherlower optimization and marketing earnings due primarily to wider location price differentials in our Natural Gas Liquids segment. These decreases were offset partially by an increase in exchange services due to higher volumes and lower rail and pipeline transportation costs in our Natural Gas Liquids segment and lower operating costs across our segments, as discussed in “Financial Results and Operating Information.”
The impact of changes in operating assets and liabilities increased operating cash flows $206.4 million for 2018,2020 was relatively unchanged compared with a decrease of $192.6 million for 2017. This change is2019, due primarily to net decreases from changes in risk-management assets and liabilities, which include a loss on the changesettlement of $750 million of our forward-starting interest-rate swaps related to our March 2020 issuance of senior unsecured notes and changes in natural gasthe fair value of risk-management assets and NGLs in storage,liabilities, which vary from period to period and vary with changes in commodity prices; the changeprices and interest rates; and changes in accounts receivable, accounts payable, and other accruals and deferrals resulting fromdeferrals. These decreases were offset partially by the timing of receipt of cash from customers and payments to vendors, suppliers and other third parties; and the change in the fair value of our risk-management assets and liabilities.
2017 vs. 2016 - Cash flows from operating activities, before changes in operating assetscommodity imbalances and liabilities, increased to $1.5 billion for 2017, compared with $1.4 billion for 2016. This increase is due primarily to higher revenues resulting from volume growth in the Williston BasinNGLs and STACK and SCOOP areas in our Natural Gas Gathering and Processing and Natural Gas Liquids segments, higher fees resulting from contract restructuring in our Natural Gas Gathering and Processing segment, higher transportation services due to increased firm demand charge contracted capacity in our Natural Gas Pipelines segment and higher optimization and marketing earnings due primarily to higher optimization volumes and wider location price differentials 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 $192.6 million for 2017, compared with a decrease of $40.8 million for 2016. This change is due primarily to the change in natural gas and NGLs in storage, which variesalso vary from period to period and varies with changes in commodity prices, the change in accounts receivable, accounts payable,prices.
and other accruals and deferrals resulting from the timing of receipt of cash from customers and payments to vendors, suppliers and other third parties and the change in risk-management assets and liabilities.
Investing Cash Flows
20182020 vs. 2017 - Cash used in investing activities increased $1.5 billion due primarily to increased capital expenditures related to our announced capital-growth projects.
2017 vs. 20162019 - Cash used in investing activities decreased $47.8$1.5 billion due primarily to reduced capital expenditures related to our completed and paused capital-growth projects.
Financing Cash Flows
2020 vs. 2019 - Cash from financing activities decreased $956.0 million due primarily to projects placed in service in 2016, offset partially by lower distributions received from unconsolidated affiliates in excess of cumulative earnings, lower proceeds from sale of assets and higher contributions to our unconsolidated affiliates.
Financing Cash Flows
2018 vs. 2017 - Cash used in financing activities decreased $862.5 million due primarily tothe issuance of common stock,$3.2 billion in long-term debt in 2020, compared with $4.2 billion in long-term debt issuances in 2019, and the $550 million draw on our $1.5 Billion Term Loan Agreement and decreased distributions to noncontrolling interests resulting from the Merger Transaction, offset partially by repayment of long-term debt and short-term borrowings, increased dividends and the acquisition of the remaining 20 percent interest in WTLPG.
2017 vs. 2016 - Cash used in financing activities increased $373.0 million due primarily to repayment of short-term borrowings and increased dividends, offset partially by the issuance of common stock throughin June 2020.
Cash Flow Analysis for the Year Ended December 31, 2019 vs. 2018 - The cash flow analysis for the year ended December 31, 2019, compared with the year ended December 31, 2018, is included in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations of our “at-the-market” equity program2019 Annual Report on Form 10-K, which is available via the SEC’s website at www.sec.gov and decreased distributions to noncontrolling interests resulting from the Merger Transaction.our website at www.oneok.com.
IMPACT OF NEW ACCOUNTING STANDARDS
Information about the impact of new accounting standards is included in Note Aof the Notes to Consolidated Financial Statements in this Annual Report.
ESTIMATES AND CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of our Consolidated Financial Statements and related disclosures in accordance with GAAP requires us to make estimates and assumptions with respect to values or conditions that cannot be known with certainty that affect the
reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities at the date of the Consolidated Financial Statements. These estimates and assumptions also affect the reported amounts of revenue and expenses during the reporting period. Although we believe these estimates and assumptions are reasonable, actual results could differ from our estimates.
The following is a summary of our most critical accounting policies and estimates, which are defined as those estimates and policies most important to the portrayal of our financial condition and results of operations and requiring management’s most difficult, subjective or complex judgment, particularly because of the need to make estimates concerning the impact of inherently uncertain matters. We have discussed the development and selection of our estimates and critical accounting policies with the Audit Committee of our Board of Directors. See Note A of the Notes to Consolidated Financial Statements in this Annual Report for the description of our accounting policies and additional information about our critical accounting policies and estimates.
Derivatives and Risk-ManagementRisk-management Activities - We utilize derivatives to reduce our market-risk exposure to commodity price and interest-rate fluctuations and to achieve more predictable cash flows. Our commodity price risk includes basis risk, which is the difference in price between various locations where commodities are purchased and sold. We record all derivative instruments at fair value, except for normal purchases and normal sales transactions that are expected to result in physical delivery. While manyMany of the contracts in our derivative portfolio are executed in liquid markets where price transparency exists, some contracts are executed in markets for which market prices may exist, but the market may be relatively inactive. This results in limited price transparency that requires management’s judgment and assumptions to estimateexists.
Our fair values. Fair value measurements classified as Level 3 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. These measurements are based on inputs that may include one or more unobservable inputs, including internally developed natural gas basis and NGLcommodity price curves, that incorporate observable and unobservable market data from broker quotes and third-party pricing services. These balances are comprised predominantly of exchange-cleared and over-the-counter derivatives for natural gas basis and NGLs. Our commodity derivatives are generally valued using forward quotes provided by third-party pricing services that are validated with other market data. We believe any measurement uncertainty at December 31, 2018,2020, is immaterial as our Level 3 fair value measurements are based on unadjusted pricing information from broker quotes and third-party pricing services.
The accounting for changes in the fair value of a derivative instrument depends on whether it qualifies and has been designated as part of a hedging relationship. When possible, we implement effective hedging strategies using derivative financial
instruments that qualify as hedges for accounting purposes. We have not used derivative instruments for trading purposes. For a derivative designated as a cash flow hedge, the gain or loss from a change in fair value of the derivative instrument is deferred in accumulated other comprehensive income (loss) until the forecasted transaction affects earnings, at which time the fair value of the derivative instrument is reclassified into earnings.
We assess the effectiveness of hedging relationships at the inception of the hedge by performingand on an effectiveness testongoing basis to determine whether they arethe hedging relationship is, and is expected to remain, highly effective. We subsequently assess qualitative factors. We do not believe that changes in our fair value estimates of our derivative instruments have a material impact on our results of operations, as the majority of our derivatives are accounted for as effective cash flow hedges. However, if a derivative instrument is ineligible for cash flow hedge accounting or if we fail to appropriately designate it as a cash flow hedge, changes in fair value of the derivative instrument would be recorded currently in earnings. Additionally, if a cash flow hedge ceases to qualify for hedge accounting treatment because it is no longer probable that the forecasted transaction will occur, the change in fair value of the derivative instrument would be recognized in earnings. For more information on commodity price sensitivity and a discussion of the market risk of pricing changes, see Item 7A, Quantitative and Qualitative Disclosures about Market Risk.
See Notes A, B and C of the Notes to Consolidated Financial Statements in this Annual Report for additional discussion of fair value measurements and derivatives and risk-management activities.
Impairment of Goodwill and Long-Lived Assets, includingIncluding Intangible Assets- We assess our goodwill for impairment at least annually onas of July 1, unless events or changes in circumstances indicate an impairment may have occurred before that time. As partDue to historic events as a result of COVID-19 impacting supply, demand and commodity prices, we performed a Step 1 analysis in the first quarter 2020 to test our goodwill for impairment and evaluated certain long-lived asset groups and equity investments for impairment.
Goodwill- 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 goodwillreporting 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 that 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. The estimated fair value of our Natural Gas Liquids and Natural Gas Pipelines reporting units substantially exceeded their respective carrying values.
We assess our goodwill for impairment at least annually as of July 1, unless events or changes in circumstances indicate an impairment may have occurred before that time. At July 1, 2020, we assessed qualitative factors subsequent to our first assessquarter 2020 impairment charges discussed below, to determine whether it was more likely than not that the fair value of our Natural Gas Liquids and Natural Gas Pipelines reporting units were less than their carrying amount. After assessing qualitative factors (including macroeconomic conditions, industry and market considerations, cost factors and overall financial performance) to determine whether, we determined that it iswas more likely than not that the fair value of each of our Natural Gas Liquids and Natural Gas Pipelines reporting units iswere not less than itstheir respective carrying amount. Ifvalue, no further testing iswas necessary or a quantitative test is elected, we perform a two-step impairment test for goodwill.
Our qualitativeand goodwill impairment analysis performed as ofwas not considered impaired. At July 1, 2018, did not result in an impairment charge nor did2020, there was no remaining goodwill associated with our analysis reflect anyNatural Gas Gathering and Processing reporting units at risk, and subsequent to that date, no event has occurred indicating that the implied fair value of each of our reporting units is less than the carrying value of its net assets.unit.
The following table sets forth our goodwill, by segment, for the periods indicated:
|
| | | | | | | |
| December 31, 2018 | | December 31, 2017 |
| (Thousands of dollars) |
Natural Gas Gathering and Processing | $ | 153,404 |
| | $ | 153,404 |
|
Natural Gas Liquids | 371,217 |
| | 371,217 |
|
Natural Gas Pipelines | 156,479 |
| | 156,479 |
|
Total goodwill | $ | 681,100 |
| | $ | 681,100 |
|
Long-lived assets - We assess our long-lived assets including intangible assets with finite useful lives, 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.
ForIn 2020, we evaluated our Natural Gas Gathering and Processing segment asset groups and determined that the investmentscarrying value of certain long-lived asset groups in the Powder River Basin, western Oklahoma and Kansas were not recoverable and exceeded their estimated fair value. We recorded noncash impairment charges of $382.2 million, which includes a natural gas processing plant and infrastructure in the Powder River Basin and its related supply contracts and natural gas processing plants and infrastructure in western Oklahoma and Kansas. In our Natural Gas Liquids segment, we accountrecorded noncash impairment charges of $71.6 million related primarily to certain inactive assets, as our expectation for underfuture use of the equity method, theassets changed.
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 value.values.
Impairment Charges - We recorded $20.2 millionIn 2020, 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 charges in 2017 relatedcharge of $30.5 million, which includes an impairment to our nonstrategic long-lived assets and equity investmentsequity-method goodwill of $22.3 million. We also concluded that the carrying value of our 50% investment in North Dakota and Oklahoma.Chisholm Pipeline Company in our Natural Gas Liquids segment exceeded its estimated fair value, resulting in a noncash impairment charge of $7.2 million.
Our impairment tests requirerequired the use of assumptions and estimates, such as industry economic factors and the profitability of future business strategies. To estimate the fair value of these assets and investments, 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 margins, operating and maintenance costs and capital expenditures. Under the market approach, our inputs included EBITDA multiples, which were estimated from recent peer acquisition transactions, and forecasted EBITDA, which incorporates inputs similar to those used under the income approach. If actual results are not consistent with our assumptions and estimates or our assumptions and estimates change due to new information, we may be exposed to future impairment charges.
See Notes A, D, E and M of the Notes to Consolidated Financial Statements in this Annual Report for additional discussion of goodwill, long-lived assets and investments in unconsolidated affiliates.
Depreciation Methods and Estimated Useful Lives of Property, Plant and Equipment-Our property, plant and equipment are depreciated using the straight-line method that incorporates management assumptions regarding useful economic lives and residual values. As we continue to increase capital spending and place additional assets in service, our estimates related to depreciation expense have become more significant and changes in estimated useful lives of our assets could have a material effect on our results of operations. At the time we place our assets in service, we believe such assumptions are reasonable; however, circumstances may develop that would cause us to change these assumptions, which would change our depreciation expense prospectively. Examples of such circumstances include changes in (i) competition, (ii) laws and regulations that limit the estimated economic life of an asset, (iii) technology that render an asset obsolete, (iv) expected salvage values and (v) forecasts of the remaining economic life for the resource basins where our assets are located, if any. For the fiscal years presented in this Form 10-K, no changes were made to the determinations of useful lives that would have a material effect on the timing of depreciation expense in future periods.
See Note D of the Notes to Consolidated Financial Statements in this Annual Report for additional discussion of property, plant and equipment.
Contingencies - Our accounting for contingencies covers a variety of business activities, including contingencies for legal and environmental exposures. We accrue these contingencies when our assessments indicate that it is probable that a liability has been incurred or an asset will not be recovered, and an amount can be reasonably estimated. We expense legal fees as incurred and base our legal liability estimates on currently available facts and our assessments of the ultimate outcome or resolution. Accruals for estimated losses from environmental remediation obligations generally are recognized no later than the completion of a remediation feasibility study. Recoveries of environmental remediation costs from other parties are recorded as assets when their receipt is deemed probable. Our expenditures for environmental evaluation, mitigation, remediation and compliance to date have not been significant in relation to our financial position or results of operations, and our expenditures related to environmental matters had no material effect on earnings or cash flows during 2018, 2017 or 2016. Actual results may differ from our estimates resulting in an impact, positive or negative, on our results of operations.
See Note N of the Notes to Consolidated Financial Statements in this Annual Report for additional discussion of contingencies.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following table sets forth our contractual obligations related to debt, leases and other long-term obligations as of December 31, 2018.2020. For additional discussion of the debt and lease agreements, see NoteNotes F and O, respectively, of the Notes to Consolidated Financial Statements in this Annual Report.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Payments Due by Period |
Contractual Obligations | | Total | | 2021 | | 2022 | | 2023 | | 2024 | | 2025 | | Thereafter |
| | (Millions of dollars) |
Senior notes | | $ | 14,347.9 | | | $ | 0 | | | $ | 1,437.7 | | | $ | 925.0 | | | $ | 500.0 | | | $ | 887.0 | | | $ | 10,598.2 | |
| | | | | | | | | | | | | | |
Guardian Pipeline senior notes | | 13.7 | | | 7.7 | | | 6.0 | | | 0 | | | 0 | | | 0 | | | — | |
Interest payments on debt | | 9,710.4 | | | 704.2 | | | 675.0 | | | 631.4 | | | 586.8 | | | 555.7 | | | 6,557.3 | |
Operating leases | | 116.1 | | | 16.5 | | | 15.1 | | | 13.8 | | | 12.5 | | | 11.1 | | | 47.1 | |
Finance lease | | 35.1 | | | 4.5 | | | 4.5 | | | 4.5 | | | 4.5 | | | 4.5 | | | 12.6 | |
Firm transportation and storage contracts | | 516.7 | | | 70.9 | | | 60.9 | | | 55.8 | | | 53.4 | | | 47.9 | | | 227.8 | |
Financial and physical derivatives | | 393.4 | | | 377.9 | | | 15.5 | | | — | | | — | | | — | | | — | |
Employee benefit plans | | 57.0 | | | 11.2 | | | 11.8 | | | 12.9 | | | 10.3 | | | 10.8 | | | — | |
Purchase commitments and other | | 369.6 | | | 83.8 | | | 83.4 | | | 81.6 | | | 41.1 | | | 40.7 | | | 39.0 | |
Total | | $ | 25,559.9 | | | $ | 1,276.7 | | | $ | 2,309.9 | | | $ | 1,725.0 | | | $ | 1,208.6 | | | $ | 1,557.7 | | | $ | 17,482.0 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Payments Due by Period |
Contractual Obligations | | Total | | 2019 | | 2020 | | 2021 | | 2022 | | 2023 | | Thereafter |
| | (Millions of dollars) |
Senior notes | | $ | 8,872.4 |
| | $ | 500.0 |
| | $ | 300.0 |
| | $ | — |
| | $ | 1,447.4 |
| | $ | 925.0 |
| | $ | 5,700.0 |
|
$1.5 Billion Term Loan Agreement (a) | | 550.0 |
| | — |
| | — |
| | 550.0 |
| | — |
| | — |
| | — |
|
Guardian Pipeline senior notes | | 29.0 |
| | 7.7 |
| | 7.7 |
| | 7.7 |
| | 5.9 |
| | — |
| | — |
|
Interest payments on debt | | 6,325.4 |
| | 463.4 |
| | 447.0 |
| | 442.1 |
| | 399.2 |
| | 355.5 |
| | 4,218.2 |
|
Operating leases | | 23.2 |
| | 6.9 |
| | 2.2 |
| | 1.9 |
| | 1.7 |
| | 1.5 |
| | 9.0 |
|
Capital lease | | 44.1 |
| | 4.5 |
| | 4.5 |
| | 4.5 |
| | 4.5 |
| | 4.5 |
| | 21.6 |
|
Firm transportation and storage contracts | | 202.4 |
| | 63.7 |
| | 51.6 |
| | 35.7 |
| | 22.4 |
| | 17.3 |
| | 11.7 |
|
Financial and physical derivatives | | 229.1 |
| | 224.8 |
| | 4.3 |
| | — |
| | — |
| | — |
| | — |
|
Employee benefit plans | | 86.9 |
| | 16.5 |
| | 14.0 |
| | 18.4 |
| | 18.5 |
| | 19.5 |
| | — |
|
Purchase commitments and other | | 190.1 |
| | 56.0 |
| | 56.5 |
| | 34.4 |
| | 14.9 |
| | 13.9 |
| | 14.4 |
|
Total | | $ | 16,552.6 |
| | $ | 1,343.5 |
| | $ | 887.8 |
| | $ | 1,094.7 |
| | $ | 1,914.5 |
| | $ | 1,337.2 |
| | $ | 9,974.9 |
|
(a) - In November 2018, we entered into our $1.5 Billion Term Loan Agreement with a syndicate of banks, which is available to be drawn until May 2019 and matures in November 2021. As of December 31, 2018, we had borrowings totaling $550 million outstanding under our $1.5 Billion Term Loan Agreement.
Senior notes and $1.5 Billion Term Loan Agreement - TheRepresents the amount of principal due in each period.
Interest payments on debt - Interest payments are calculated by multiplying long-term debt principal amount by the respective coupon rates.
Operating leases - Our operating leases primarily include leases for pipeline capacity, certain buildings, warehouses, office space, land and equipment, including pipeline equipment, rail cars and information technology equipment.
CapitalFinance lease - We lease certain compression facilities under a capitalfinance lease that has a fixed-price purchase option in 2028.
Firm transportation and storage contracts - Our Natural Gas Gathering and Processing and Natural Gas Liquids segments are party to fixed-pricefixed-rate contracts for firm transportation and storage capacity.
Financial and physical derivatives - These are obligations arising from our fixed- and variable-price purchase commitments for physical and financial commodity derivatives. Estimated future variable-price purchase commitments are based on market information at December 31, 2018.2020. Actual future variable-price purchase obligations may vary depending on market prices at the time of delivery. Sales of the related physical volumes and net positive settlements of financial derivatives are not reflected in the table above.
Employee benefit plans - Represents projected minimum required cash contributions. We contributed $14.5$11.2 million to our defined benefit pension plan in January 20192021 and do not expect to make $2.0 million inany contributions to our other postretirement plans in 2019.
the remainder of 2021. See Note K of the Notes to Consolidated Financial Statements in this Annual Report for discussion of our employee benefit plans.
Purchase commitments and other - Purchase commitments include commitments related to our growth capital expenditurespayments for NGL fractionation capacity and other contractual commitments. Purchase commitments exclude commodity purchase contracts, which are included in the “Financial and physical derivatives” amounts.
FORWARD-LOOKING STATEMENTS
Some of the statements contained and incorporated in this Annual 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 natural gas liquidsNGL pipelines, processing and processingfractionation 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 Annual Report identified by words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “project,“forecast,” “goal,” “guidance,” “intend,” “may,” “might,” “outlook,” “plan,” “believe,“potential,” “project,” “scheduled,” “should,” “goal,“will,” “forecast,“would,” “guidance,” “could,” “may,” “continue,” “might,” “potential,” “scheduled” and other words and terms of similar meaning.
One should not place undue reliance on forward-looking statements. Known and unknown risks, uncertainties and other factors may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by forward-looking statements. Those factors may affect our operations, markets, products, services and prices. In addition to any assumptions and other factors referred to specifically in connection with the forward-looking statements, factors that could cause our actual results to differ materially from those contemplated in any forward-looking statement include, among others, the following:
•the length, severity and reemergence of a pandemic or other health crisis, such as the 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 counterparties from operating in the ordinary course for an extended period and increase the cost of operating our business;
•operational challenges relating to the COVID-19 pandemic and efforts to mitigate the spread of the virus, including logistical challenges, protecting the health and well-being of our employees, remote work arrangements, performance of contracts and supply chain disruption;
•the impact on drilling and production by factors beyond our control, including the demand for natural gas and crude oil; producers’ desire and ability to drill and obtain necessary permits; regulatory compliance; reserve performance; and capacity constraints and/or shut downs on the pipelines that transport crude oil, natural gas and NGLs from producing areas and our facilities;
•risks associated with adequate supply to our gathering, processing, fractionation and pipeline facilities, including production declines that outpace new drilling, the shutting-in of production by producers, actions taken by federal, state or local governments to require producers to prorate or to cut their production levels as a way to address any excess market supply situations or extended periods of ethane rejection;
•demand for our services and products in the proximity of our facilities;
•economic climate and growth in the geographic areas in which we operate;
•the risk of a slowdown in growth or decline in the United States or international economies, including liquidity risks in United States or foreign credit markets;
•performance of contractual obligations by our customers, service providers, contractors and shippers;
•the effects of changes in governmental policies and regulatory actions, including changes with respect to income and other taxes, pipeline safety, environmental compliance, climate change initiatives, production limits and authorized rates of recovery of natural gas and natural gas transportation costs;
•changes in demand for the use of natural gas, NGLs and crude oil because of the development of new technologies or other market conditions caused by concerns about climate change;
•the effects of weather and other natural phenomena, including climate change, on our operations, demand for our services and energy prices;
•acts of nature, sabotage, terrorism or other similar acts that cause damage to our facilities or our suppliers’, customers’ or shippers’ facilities;
•the possibility of future terrorist attacks or the possibility or occurrence of an outbreak of, or changes in, hostilities or changes in the political conditions throughout the world;
•the risk of increased costs for insurance premiums, security or other items as a consequence of terrorist attacks;
•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;
•competition from other United States and foreign energy suppliers and transporters, as well as alternative forms of energy, including, but not limited to, solar power, wind power, geothermal energy and biofuels such as ethanol and biodiesel;
•the capital intensive natureability 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;
•the efficiency of our businesses;plants in processing natural gas and extracting and fractionating NGLs;
•the profitabilitycomposition and quality of assets or businesses acquired or constructed by us;the natural gas and NGLs we gather and process in our plants and transport on our pipelines;
our ability to make cost-saving changes in operations;
•risks of marketing, trading and hedging activities, including the risks of changes in energy prices or the financial condition of our counterparties;
•our ability to control operating costs and make cost-saving changes;
•the uncertaintyrisk inherent in the use of estimates,information systems in our respective businesses and those of our counterparties and service providers, including accrualscyber-attacks, which, according to experts, have increased in volume and costssophistication since the beginning of environmental remediation;
the effectsCOVID-19 pandemic; implementation of changes in governmental policiesnew software and regulatory actions, including changes with respect to incomehardware; and other taxes, pipeline safety, environmental compliance, climate change initiatives and authorized rates of recovery of natural gas and natural gas transportation costs;
the impact on drillingthe timeliness of information for financial reporting;
•the timely receipt of approval by applicable governmental entities for construction and production by factors beyondoperation of our control,pipeline and other projects and required regulatory clearances;
•the ability to recover operating costs and amounts equivalent to income taxes, costs of property, plant and equipment and regulatory assets in our state and FERC-regulated rates;
•the results of 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 demand for natural gasFERC, the National Transportation Safety Board, the PHMSA, the EPA and crude oil; producers’ desirethe CFTC;
•the mechanical integrity of facilities and ability to obtain necessary permits; reserve performance; and capacity constraints on pipelines operated;
•the pipelines that transport crude oil, natural gas and NGLs from producing areas andcapital-intensive nature of our facilities;businesses;
difficulties or delays experienced by trucks, railroads or pipelines in delivering products to or from our terminals or pipelines;
the effects of weather and other natural phenomena, including climate change, on our operations, demand for our services and energy prices;
changes in demand for the use of natural gas, NGLs and crude oil because of market conditions caused by concerns about climate change;
•the impact of unforeseen changes in interest rates, debt and equity markets, inflation rates, economic recession and other external factors over which we have no control, including the effect on pension and postretirement expense and funding resulting from changes in equity and bond market returns;
•actions by rating agencies concerning our credit;
•our indebtedness and guarantee obligations could make us vulnerable to general adverse economic and industry conditions, limit our ability to borrow additional funds and/or place us at competitive disadvantages compared with our competitors that have less debt or have other adverse consequences;
actions by rating agencies concerning our credit;
the results of administrative proceedings and litigation, regulatory actions, rule changes and receipt of expected clearances involving any local, state or federal regulatory body, including the FERC, the National Transportation Safety Board, the PHMSA, the EPA and CFTC;
•our ability to access capital at competitive rates or on terms acceptable to us;
risks associated with adequate supply to our gathering, processing, fractionation and pipeline facilities, including production declines that outpace new drilling or extended periods of ethane rejection;
the risk that material weaknesses or significant deficiencies in our internal controls over financial reporting could emerge or that minor problems could become significant;
the impact and outcome of pending and future litigation;
the timing and extent of changes in energy commodity prices;
the ability to market pipeline capacity on favorable terms, including the effects of:
| |
– | future demand for and prices of natural gas, NGLs and crude oil; |
| |
– | competitive conditions in the overall energy market; |
| |
– | availability of supplies of Canadian and United States natural gas and crude oil; and |
| |
– | availability of additional storage capacity; |
performance of contractual obligations by our customers, service providers, contractors and shippers;
the timely receipt of approval by applicable governmental entities for construction and operation of our pipeline and other projects and required regulatory clearances;
•our ability to acquire all necessary permits, consents or other approvals in a timely manner, to promptly obtain all necessary materials and supplies required for construction, and to construct gathering, processing, storage, fractionation and transportation facilities without labor or contractor problems;
the mechanical integrity of facilities operated;
demand for our services in the proximity of our facilities;
•our ability to control operating costs;construction costs and completion schedules of our pipelines and other projects;
acts•difficulties or delays experienced by trucks, railroads or pipelines in delivering products to or from our terminals or pipelines;
•the uncertainty of nature, sabotage, terrorism or other similar acts that cause damage to our facilities or our suppliers’ or shippers’ facilities;estimates, including accruals and costs of environmental remediation;
economic climate and growth in the geographic areas in which we do business;
the risk of a prolonged slowdown in growth or decline in the United States or international economies, including liquidity risks in United States or foreign credit markets;
•the impact of recently issued and future accounting updates and other changesuncontracted capacity in accounting policies;our assets being greater or less than expected;
•the possibilityimpact of future terrorist attackspotential impairment charges;
•the profitability of assets or the possibilitybusinesses acquired or occurrence of an outbreak of, or changes in, hostilities or changes in the political conditions throughout the world;constructed by us;
the risk of increased costs for insurance premiums, security or other items as a consequence of terrorist attacks;
•risks associated with pending or possible acquisitions and dispositions, including our ability to finance or integrate any such acquisitions and any regulatory delay or conditions imposed by regulatory bodies in connection with any such acquisitions and dispositions;
•the risk that material weaknesses or significant deficiencies in our internal controls over financial reporting could emerge or that minor problems could become significant;
•the impact and outcome of pending and future litigation;
•the impact of uncontracted capacity in our assets being greater or less than expected;
the ability to recover operating costsrecently issued and amounts equivalent to income taxes, costs of property, plant and equipment and regulatory assets in our state and FERC-regulated rates;
the composition and quality of the natural gas and NGLs we gather and process in our plants and transport on our pipelines;
the efficiency of our plants in processing natural gas and extracting and fractionating NGLs;
the impact of potential impairment charges;
the risk inherent in the use of information systems in our respective businesses, implementation of new software and hardware, and the impact on the timeliness of information for financial reporting;
our ability to control construction costs and completion schedules of our pipelinesfuture accounting updates and other projects;changes in accounting policies; and
•the risk factors listed in the reports we have filed and may file with the SEC, which are incorporated by reference.
These factors are not necessarily all of the important factors that could cause actual results to differ materially from those expressed in any of our forward-looking statements. Other factors could also have material adverse effects onaffect adversely our future results. These and other risks are described in greater detail in Part I, Item 1A, Risk Factors, in this 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 7A. 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 established by our Risk Oversight and Strategy Committee to monitor our natural gas, condensate and NGL marketing activities and interest rates to ensure our hedging activities mitigate market risks.risks and comply with approved thresholds or limits. We do not use financial instruments for trading purposes.
We utilize a sensitivity analysis model to assess the risk associated with our derivative portfolio. The sensitivity analysis measures the potential change in fair value of our derivative instruments based upon a hypothetical 10% movement in the underlying commodity prices or interest rates. In addition to these variables, the fair value of our derivative portfolio is influenced by fluctuations in the notional amounts of the instruments and the discount rates used to determine the present values. Because we enter into these derivative instruments for the purpose of mitigating the risks that accompany certain of our business activities, as described below, the change in the market value of our derivative portfolio would typically be offset largely by a corresponding gain or loss on the hedged item.
See Note Aof the Notes to Consolidated Financial Statements in this Annual Report for discussion on our accounting policies for our derivative instruments and the impact on our Consolidated Financial Statements.
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 Annual 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 POPfee with feePOP contracts. Under certain POPfee with feePOP 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.
The following table presents the effect a hypothetical 10% change in the underlying commodity prices would have on the estimated fair value of our commodity derivative instruments for the periods indicated:
| | | | | | | | | | | |
Commodity Contracts | December 31, 2020 | | December 31, 2019 |
| (Millions of dollars) |
Crude oil and NGLs | $ | 20.0 | | | $ | 26.1 | |
Natural gas | 10.6 | | | 12.7 | |
Total change in estimated fair value of commodity contracts | $ | 30.6 | | | $ | 38.8 | |
Our sensitivity analysis represents an estimate of the reasonably possible gains and losses that would be recognized on our commodity derivative contracts assuming hypothetical movements in future market prices and is not necessarily indicative of actual results that may occur. Actual gains and losses may differ from estimates due to actual fluctuations in market prices, as well as changes in our commodity derivative portfolio during the year.
The following tables set forth hedging information for our Natural Gas Gathering and Processing segment’s forecasted equity volumes for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ending December 31, 2021 |
| | Volumes Hedged | | Average Price | | Percentage Hedged |
NGLs - excluding ethane (MBbl/d) - Conway/Mont Belvieu | | 10.4 | | | $ | 0.51 | | / gallon | | 60% |
Condensate (MBbl/d) - WTI-NYMEX | | 2.9 | | | $ | 42.87 | | / Bbl | | 74% |
Natural gas (BBtu/d) - NYMEX and basis | | 118.6 | | | $ | 2.64 | | / MMBtu | | 75% |
|
| | | | | | | | | | |
| | Year Ending December 31, 2019 |
| | Volumes Hedged | | Average Price | | Percentage Hedged |
NGLs - excluding ethane (MBbl/d) - Conway/Mont Belvieu | | 7.6 |
| | $ | 0.71 |
| / gallon | | 75% |
Condensate (MBbl/d) - WTI-NYMEX | | 2.7 |
| | $ | 58.55 |
| / Bbl | | 92% |
Natural gas (BBtu/d) - NYMEX and basis | | 82.0 |
| | $ | 2.30 |
| / MMBtu | | 81% |
|
| | | | | | | | | | |
| | Year Ending December 31, 2020 |
| | Volumes Hedged | | Average Price | | Percentage Hedged |
NGLs - excluding ethane (MBbl/d) - Conway/Mont Belvieu | | 2.0 |
| | $ | 0.61 |
| / gallon | | 22% |
Condensate (MBbl/d) - WTI-NYMEX | | 0.8 |
| | $ | 55.25 |
| / Bbl | | 26% |
Natural gas (BBtu/d) - NYMEX and basis | | 39.1 |
| | $ | 2.46 |
| / MMBtu | | 49% |
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 December 31, 2018.2020. 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-gallonper gallon change in the composite price of NGLs, excluding ethane, would change adjusted EBITDA for the yearsyear ending December 31, 2019 and 2020,2021, by $1.6 million and $1.7 million, respectively;$2.7 million;
•a $1.00 per-barrelper barrel change in the price of crude oil would change adjusted EBITDA for the yearsyear ending December 31, 20192021, by $1.4 million; and 2020, by $1.5 million and $1.6 million, respectively; and
•a $0.10 per-MMBtuper MMBtu change in the price of residue natural gas would change adjusted EBITDA for the yearsyear ending December 31, 2019 and 2020,2021, by $3.9 million and $3.6 million, respectively.$5.8 million.
These estimates do not include any effects of hedging or effects on demand for our services or natural gas processing plant operations that might be caused by, or arise in conjunction with, commodity price fluctuations. For example, a change in the gross processing spread may cause a change in the amount of ethane extracted from the natural gas stream, impacting gathering and processing financial results for certain contracts.
INTEREST-RATE RISK
We are exposed to interest-rate risk through borrowings under our $2.5 Billion Credit Agreement, $1.5 Billion Term Loan Agreement, commercial paper program and long-term debt issuances. Future increases in LIBOR, corporate commercial paper rates or corporate bond rates could expose us to increased interest costs on future borrowings. We manage interest-rate risk through the use of fixed-rate debt, floating-rate debt and interest-rate swaps and treasury lock contracts.swaps. Interest-rate swaps are agreements to exchange interest payments at some future point based on specified notional amounts. In 2018,2020, we entered into $2.8 billion of forward-starting interest-rate swaps and treasury lock contracts to hedge the variability of interest payments on a portion of our forecasted debt issuances that may result from changes in the benchmark interest rate before the debt is issued and $1.3 billion of forward-starting interest-rate swaps used to hedge the variability of our LIBOR-based interest payments. We also settled $1.0 billion$750 million of our forward-starting interest-rate swaps and treasury lock contracts related to our underwritten public offeringofferings of $1.25$1.75 billion senior unsecured notes completed in July 2018, and $500 millionthe remaining $1.3 billion of our interest-rate swaps in January 2018 used to hedge our LIBOR-based interest payments.payments upon repayment of the remaining balance of our $1.5 Billion Term Loan Agreement.
At December 31, 20182020 and 2017,2019, we had forward-starting interest-rate swaps with notional amounts totaling $3.0$1.1 billion and $1.3$1.8 billion, respectively, to hedge the variability of interest payments on a portion of our forecasted debt issuances. At December 31, 2018 and 2017,2019, we had interest-rate swaps with notional amounts totaling $1.3 billion and $500 million, respectively, to hedge the variability of our LIBOR-based interest payments.payments, all of which have settled as of December 31, 2020. All of our interest-rate swaps are designated as cash flow hedges. At December 31, 2018,2020, we had derivative assets of $19 million and derivative liabilities of $99$203.4 million related to these interest-rate swaps. At December 31, 2017,2019, we had derivative assets of $50$0.6 million and derivative liabilities of $201.9 million related to these interest-rate swaps.
The following table presents the effect of a 10% hypothetical change in interest rates on the estimated fair value of our interest- rate derivative instruments for the periods indicated:
| | | | | | | | | | | |
| December 31, 2020 | | December 31, 2019 |
| (Millions of dollars) |
Forward-starting interest-rate swaps | $ | 12.9 | | | $ | 40.5 | |
Our sensitivity analysis represents an estimate of the reasonably possible gains and losses that would be recognized on our interest-rate derivative contracts assuming hypothetical movements in future interest rates and is not necessarily indicative of actual results that may occur. Actual gains and losses may differ from estimates due to actual fluctuations in interest rates, as well as changes in our interest-rate derivative portfolio during the year.
See Note C of the Notes to Consolidated Financial Statements in this Annual 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.
Customer concentration - In 2018, no single customer represented more than 10 percent of our consolidated revenues.
Natural Gas Gathering and Processing - Our Natural Gas Gathering and Processing segment derives services revenue primarily from major and independent crude oil and natural gas producers, which include both large integrated and independent exploration and production companies. In this segment, our downstream commodity sales customers are primarily utilities, large industrial companies, marketing companies and our NGL affiliate. We are not typically exposed to material credit risk with producers under POPfee with feePOP contracts as we sell the commodities and remit a portion of the sales proceeds back to the producer less our contractual fees. In 20182020 and 2017,2019, approximately 95 percent90% of the downstream commodity sales in our Natural Gas Gathering and Processing segment were made to investment-grade customers as rated investment-grade by S&P, Moody’s or ourapproved through comparable internal ratings,counterparty analysis, or were secured by letters of credit or other collateral.
Natural Gas Liquids - Our Natural Gas Liquids segment’s counterparties are primarily NGL and natural gas gathering and processing companies; major and independent crude oil and natural gas production companies; utilities; large industrial companies; natural gasoline distributors; propane distributors; municipalities; and petrochemical, refining and marketing companies. We charge fees to NGL and natural gas gathering and processing counterparties and natural gas liquidsNGL pipeline transportation customers. We are not typically exposed to material credit risk on the majority of our exchange services fees, as we purchase NGLs from our gathering and processing counterparties and deduct our fee from the amounts we remit. We also earn sales revenue on the downstream sales of NGL products. In 20182020 and 2017,2019, approximately 80 percent75% and 80%, respectively, of this segment’s commodity sales were made to investment-grade customers as rated investment-grade by S&P, Moody’s or ourapproved through comparable internal ratings,counterparty analysis, or were secured by letters of credit or other collateral. In addition, the majority of our Natural Gas Liquids segment’s pipeline tariffs provide us the ability to require security from shippers.
Natural Gas Pipelines - Our Natural Gas Pipelines segment’s customers are primarily local natural gas distribution companies, electric-generation facilities, large industrial companies, municipalities, producers, processors and marketing companies. In 20182020 and 2017,2019, approximately 85 percent and 90 percent, respectively,85% of our revenues in this segment were from investment-grade customers as rated investment-grade by S&P, Moody’s or ourapproved through comparable internal ratings,counterparty analysis, or were secured by letters of credit or other collateral. In addition, the majority of our Natural Gas Pipelines segment’s pipeline tariffs provide us the ability to require security from shippers.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
To theBoard of Directors and Shareholders of ONEOK, Inc.:
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of ONEOK, Inc.and its subsidiaries (the(the “Company”) as of December 31, 20182020 and December 31, 2017, and2019, the related consolidated statements of income, of comprehensive income, of changes in equity and of cash flowsfor each of the three years in the period ended December 31, 2018,2020, including the related notes (collectively referred to as the “consolidated financial statements”).We also have audited the Company’sCompany's internal control over financial reporting as of December 31, 2018,2020, based on criteria established in Internal Control - Integrated Framework(2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidatedfinancial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 20182020 and December 31, 2017,2019, and the results of itsoperations and itscash flows for each of the three years in the period ended December 31, 20182020 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018,2020, based on criteria established in Internal Control - Integrated Framework(2013)issued by the COSO.
Change in Accounting Principle
As discussed in NotesNote A and O to the consolidated financial statements, the Company changed the manner in which it accounts for revenue from contracts with customers in 2018.
Basis for Opinions
The Company’sCompany's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’sManagement's Report on Internal Control overOver Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidatedfinancial statements and on the Company’sCompany's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidatedfinancial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidatedfinancial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidatedfinancial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matters communicated beloware mattersarising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidatedfinancial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Valuation of Level 3 Commodity Derivative Assets and Liabilities
As described in Notes A and B to the consolidated financial statements, the Company’s level 3 commodity contracts derivative assets and liabilities total $103.8 million and $135.1 million, respectively, as of December 31, 2020. As disclosed by management, commodity price risk includes basis risk, which is the difference in price between various locations where commodities are purchased and sold. Management records all derivative instruments at fair value, with the exception of normal purchases and normal sales transactions that are expected to result in physical delivery. Many of the contracts in its derivative portfolio are executed in liquid markets where price transparency exists. Fair value measurements classified as Level 3 are composed predominantly of exchange-cleared and over-the-counter derivatives to hedge NGL price risk and natural gas basis risk. These 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. The commodity derivatives are generally valued using forward quotes provided by third-party pricing services that are validated with other market data.
The principal considerations for our determination that performing procedures relating to the valuation of level 3 commodity derivative assets and liabilities is a critical audit matter are (i) the significant judgment by management to determine the fair value of these derivatives; (ii) a high degree of auditor judgment, subjectivity and effort in evaluating audit evidence related to the valuation due to the use of internally developed commodity price curves that incorporate market data from broker quotes and third-party pricing services; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements.These procedures included testing the effectiveness of controls relating to the valuation of level 3 commodity derivative assets and liabilities, including controls over the Company’s model, significant assumptions, and data. These procedures alsoincluded, among others, the involvement of professionals with specialized skill and knowledge to assist in developing an independent estimate of the level 3 commodity derivative assets and liabilities and comparison of the independent estimate to management’s estimate to evaluate the reasonableness of management’s estimate. Developing the independent estimate involved testing the completeness and accuracy of data provided by management and evaluating management’s assumptions related to the internally developed commodity price curves which incorporate market data from broker quotes and third-party pricing services.
Long-Lived Asset Impairment – Asset Group in the Powder River Basin
As described in NotesA and B to the consolidated financial statements, the Company’s net property, plant and equipment balance was $19.2 billion as of December 31, 2020. Management assesses the Company’s 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, the Company will record an impairment loss equal to the difference between the carrying value and the fair value of the long-lived asset. In 2020, Management evaluated the Natural Gas Gathering and Processing segment asset groups and determined that the carrying value of certain long-lived asset groups were not recoverable and exceeded their estimated fair value. The Company recorded noncash impairment charges of $382.2 million in its Natural Gas Gathering and Processing segment, of which a portion includes a natural gas processing plant and infrastructure in the Powder River Basin and its related supply contracts. To estimate the fair value, Management used the income approach. Under the income approach, the discounted cash flow analysis included the following inputs that are not readily available: a discount rate reflective of industry cost of capital, estimated contract rates, volumes, operating margins, operating and maintenance costs, and capital expenditures.
The principal considerations for our determination that performing procedures relating to long-lived asset impairments of an asset group in the Powder River Basin is a critical audit matter are (i) the significant judgment by management when developing the fair value of the long-lived asset and (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures andevaluating management’s significant assumptions related to volumes and operating margins.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s long-lived asset impairment assessment, including the controls over the valuation of long-lived assets. These procedures also included, among others (i) testing management’s process for developing the fair value estimate of an asset group in the Powder River Basin; (ii) evaluating the appropriateness of the discounted cash flow model; (iii) testing the completeness and accuracy of underlying data used in the model; and (iv) evaluating the reasonableness of the significant assumptions used by management related to the volumes and operating margins. Evaluating management’s assumptions related to the volumes and operating margins involved evaluating whether the assumptions used by management were reasonable considering (i) the current and past performance of the asset group and (ii) whether these assumptions were consistent with evidence obtained in other areas of the audit.
/s/ PricewaterhouseCoopers LLP
Tulsa, OKOklahoma
February 26, 201923, 2021
We have served as the Company’s auditor since 2007.
|
| | | | | | | | | | | | |
ONEOK, Inc. and Subsidiaries | | | | | | |
CONSOLIDATED STATEMENTS OF INCOME | | | | | | |
| | | | | | |
| | Years Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| | (Thousands of dollars, except per share amounts) |
Revenues | | | | | | |
Commodity sales | | $ | 11,395,642 |
| | $ | 9,862,652 |
| | $ | 6,858,456 |
|
Services | | 1,197,554 |
| | 2,311,255 |
| | 2,062,478 |
|
Total revenues | | 12,593,196 |
|
| 12,173,907 |
| | 8,920,934 |
|
Cost of sales and fuel (exclusive of items shown separately below) | | 9,422,708 |
| | 9,538,045 |
| | 6,496,124 |
|
Operations and maintenance | | 803,146 |
| | 724,314 |
| | 658,233 |
|
Depreciation and amortization | | 428,557 |
| | 406,335 |
| | 391,585 |
|
Impairment of long-lived assets (Note D) | | — |
| | 15,970 |
| | — |
|
General taxes | | 103,922 |
| | 98,396 |
| | 88,849 |
|
Gain on sale of assets | | (601 | ) | | (924 | ) | | (9,635 | ) |
Operating income | | 1,835,464 |
| | 1,391,771 |
| | 1,295,778 |
|
Equity in net earnings from investments (Note M) | | 158,383 |
| | 159,278 |
| | 139,690 |
|
Impairment of equity investments (Note M) | | — |
| | (4,270 | ) | | — |
|
Allowance for equity funds used during construction | | 7,962 |
| | 107 |
| | 209 |
|
Other income | | 674 |
| | 15,385 |
| | 6,091 |
|
Other expense | | (14,928 | ) | | (35,812 | ) | | (14,161 | ) |
Interest expense (net of capitalized interest of $28,062, $5,510 and $10,591, respectively) | | (469,620 | ) | | (485,658 | ) | | (469,651 | ) |
Income before income taxes | | 1,517,935 |
| | 1,040,801 |
| | 957,956 |
|
Income taxes (Note L) | | (362,903 | ) | | (447,282 | ) | | (212,406 | ) |
Income from continuing operations | | 1,155,032 |
| | 593,519 |
| | 745,550 |
|
Income (loss) from discontinued operations, net of tax | | — |
| | — |
| | (2,051 | ) |
Net income | | 1,155,032 |
| | 593,519 |
| | 743,499 |
|
Less: Net income attributable to noncontrolling interests | | 3,329 |
| | 205,678 |
| | 391,460 |
|
Net income attributable to ONEOK | | 1,151,703 |
| | 387,841 |
| | 352,039 |
|
Less: Preferred stock dividends | | 1,100 |
| | 767 |
| | — |
|
Net income available to common shareholders | | $ | 1,150,603 |
| | $ | 387,074 |
| | $ | 352,039 |
|
Amounts available to common shareholders: | | | | | | |
Income from continuing operations | | $ | 1,150,603 |
| | $ | 387,074 |
| | $ | 354,090 |
|
Income (loss) from discontinued operations | | — |
| | — |
| | (2,051 | ) |
Net income | | $ | 1,150,603 |
| | $ | 387,074 |
| | $ | 352,039 |
|
Basic earnings per common share: | | | | | | |
Income from continuing operations (Note I) | | $ | 2.80 |
| | $ | 1.30 |
| | $ | 1.68 |
|
Income (loss) from discontinued operations | | — |
| | — |
| | (0.01 | ) |
Net income | | $ | 2.80 |
| | $ | 1.30 |
| | $ | 1.67 |
|
Diluted earnings per common share: | | | | | | |
Income from continuing operations (Note I) | | $ | 2.78 |
| | $ | 1.29 |
| | $ | 1.67 |
|
Income (loss) from discontinued operations | | — |
| | — |
| | (0.01 | ) |
Net income | | $ | 2.78 |
| | $ | 1.29 |
| | $ | 1.66 |
|
Average shares (thousands) | | | | | | |
Basic | | 411,485 |
| | 297,477 |
| | 211,128 |
|
Diluted | | 414,195 |
| | 299,780 |
| | 212,383 |
|
| | | | | | | | | | | | | | | | | | | | |
ONEOK, Inc. and Subsidiaries | | | | | | |
CONSOLIDATED STATEMENTS OF INCOME | | | | | | |
| | | | | | |
| | Years Ended December 31, |
| | 2020 | | 2019 | | 2018 |
| | (Thousands of dollars, except per share amounts) |
Revenues | | | | | | |
Commodity sales | | $ | 7,255,259 | | | $ | 8,916,047 | | | $ | 11,395,642 | |
Services | | 1,286,983 | | | 1,248,320 | | | 1,197,554 | |
Total revenues (Note P) | | 8,542,242 | | | 10,164,367 | | | 12,593,196 | |
Cost of sales and fuel (exclusive of items shown separately below) | | 5,110,146 | | | 6,788,040 | | | 9,422,708 | |
Operations and maintenance | | 761,176 | | | 863,708 | | | 803,146 | |
Depreciation and amortization | | 578,662 | | | 476,535 | | | 428,557 | |
Impairment charges (Note A) | | 607,200 | | | 0 | | | 0 | |
General taxes | | 125,028 | | | 119,156 | | | 103,922 | |
(Gain) loss on sale of assets | | (1,327) | | | 2,575 | | | (601) | |
Operating income | | 1,361,357 | | | 1,914,353 | | | 1,835,464 | |
Equity in net earnings from investments (Note M) | | 143,241 | | | 154,541 | | | 158,383 | |
Impairment of equity investments (Note A) | | (37,730) | | | 0 | | | 0 | |
Allowance for equity funds used during construction | | 23,662 | | | 64,815 | | | 7,962 | |
Other income | | 43,745 | | | 27,058 | | | 674 | |
Other expense | | (19,073) | | | (18,003) | | | (14,928) | |
Interest expense (net of capitalized interest of $75,436, $107,275 and $28,062, respectively) | | (712,886) | | | (491,773) | | | (469,620) | |
Income before income taxes | | 802,316 | | | 1,650,991 | | | 1,517,935 | |
Income taxes (Note L) | | (189,507) | | | (372,414) | | | (362,903) | |
Net income | | 612,809 | | | 1,278,577 | | | 1,155,032 | |
Less: Net income attributable to noncontrolling interests | | 0 | | | 0 | | | 3,329 | |
Net income attributable to ONEOK | | 612,809 | | | 1,278,577 | | | 1,151,703 | |
Less: Preferred stock dividends | | 1,100 | | | 1,100 | | | 1,100 | |
Net income available to common shareholders | | $ | 611,709 | | | $ | 1,277,477 | | | $ | 1,150,603 | |
| | | | | | |
Basic EPS (Note I) | | $ | 1.42 | | | $ | 3.09 | | | $ | 2.80 | |
| | | | | | |
Diluted EPS (Note I) | | $ | 1.42 | | | $ | 3.07 | | | $ | 2.78 | |
Average shares (thousands) | | | | | | |
Basic | | 431,105 | | | 413,560 | | | 411,485 | |
Diluted | | 431,782 | | | 415,444 | | | 414,195 | |
See accompanying Notes to Consolidated Financial Statements.
|
| | | | | | | | | | | | |
ONEOK, Inc. and Subsidiaries | | | | | | |
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME | | | | |
| | |
| | Years Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| | (Thousands of dollars) |
Net income | | $ | 1,155,032 |
| | $ | 593,519 |
| | $ | 743,499 |
|
Other comprehensive income (loss), net of tax | | |
| | |
| | |
|
Unrealized gains (losses) on derivatives, net of tax of $1,694, $19,006 and $5,452 respectively | | (5,673 | ) | | (21,408 | ) | | (30,300 | ) |
Realized (gains) losses on derivatives recognized in net income, net of tax of $(11,013), $(26,899) and $230, respectively | | 36,870 |
| | 63,687 |
| | (6,977 | ) |
Change in pension and postretirement benefit plan liability, net of tax of $(1,425), $(878) and $11,128, respectively | | 4,771 |
| | (4,175 | ) | | (16,693 | ) |
Other comprehensive income (loss) on investments in unconsolidated affiliates, net of tax of $(724), $145 and $270, respectively | | 2,424 |
| | (970 | ) | | (1,505 | ) |
Total other comprehensive income (loss), net of tax | | 38,392 |
| | 37,134 |
| | (55,475 | ) |
Comprehensive income | | 1,193,424 |
| | 630,653 |
| | 688,024 |
|
Less: Comprehensive income attributable to noncontrolling interests | | 3,329 |
| | 236,704 |
| | 363,093 |
|
Comprehensive income attributable to ONEOK | | $ | 1,190,095 |
| | $ | 393,949 |
| | $ | 324,931 |
|
| | | | | | | | | | | | | | | | | | | | |
ONEOK, Inc. and Subsidiaries | | | | | | |
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME | | | | |
| | |
| | Years Ended December 31, |
| | 2020 | | 2019 | | 2018 |
| | (Thousands of dollars) |
Net income | | $ | 612,809 | | | $ | 1,278,577 | | | $ | 1,155,032 | |
Other comprehensive income (loss), net of tax | | | | | | |
Change in fair value of derivatives, net of tax of $49,292, $44,149 and $1,694, respectively | | (165,023) | | | (147,803) | | | (5,673) | |
Derivative amounts reclassified to net income, net of tax of $(6,313), $6,058 and $(11,013), respectively | | 21,097 | | | (21,057) | | | 36,870 | |
Change in retirement and other postretirement benefit plan obligations, net of tax of $7,812, $2,910 and $(1,425), respectively | | (26,154) | | | (9,696) | | | 4,771 | |
Other comprehensive income (loss) of unconsolidated affiliates, net of tax of $2,201, $2,152 and $(724), respectively | | (7,369) | | | (7,205) | | | 2,424 | |
Total other comprehensive income (loss), net of tax | | (177,449) | | | (185,761) | | | 38,392 | |
Comprehensive income | | 435,360 | | | 1,092,816 | | | 1,193,424 | |
Less: Comprehensive income attributable to noncontrolling interests | | 0 | | | 0 | | | 3,329 | |
Comprehensive income attributable to ONEOK | | $ | 435,360 | | | $ | 1,092,816 | | | $ | 1,190,095 | |
See accompanying Notes to Consolidated Financial Statements.
|
| | | | | | | | |
ONEOK, Inc. and Subsidiaries | | | | |
CONSOLIDATED BALANCE SHEETS | | | | |
| | December 31, | | December 31, |
| | 2018 | | 2017 |
Assets | | (Thousands of dollars) |
Current assets | | | | |
Cash and cash equivalents | | $ | 11,975 |
| | $ | 37,193 |
|
Accounts receivable, net | | 818,958 |
| | 1,202,951 |
|
Materials and supplies | | 141,174 |
| | 90,301 |
|
Natural gas and natural gas liquids in storage | | 296,667 |
| | 342,293 |
|
Commodity imbalances | | 29,050 |
| | 38,712 |
|
Other current assets | | 100,808 |
| | 53,008 |
|
Total current assets | | 1,398,632 |
| | 1,764,458 |
|
Property, plant and equipment | | |
| | |
|
Property, plant and equipment | | 18,030,963 |
| | 15,559,667 |
|
Accumulated depreciation and amortization | | 3,264,312 |
| | 2,861,541 |
|
Net property, plant and equipment (Note D) | | 14,766,651 |
| | 12,698,126 |
|
Investments and other assets | | |
| | |
|
Investments in unconsolidated affiliates (Note M) | | 969,150 |
| | 1,003,156 |
|
Goodwill and intangible assets (Note E) | | 967,142 |
| | 993,460 |
|
Deferred income taxes (Note L) | | — |
| | 205,907 |
|
Other assets | | 130,096 |
| | 180,830 |
|
Total investments and other assets | | 2,066,388 |
| | 2,383,353 |
|
Total assets | | $ | 18,231,671 |
| | $ | 16,845,937 |
|
| | | | | | | | | | | | | | |
ONEOK, Inc. and Subsidiaries | | | | |
CONSOLIDATED BALANCE SHEETS | | | | |
| | | | |
| | December 31, | | December 31, |
| | 2020 | | 2019 |
Assets | | (Thousands of dollars) |
Current assets | | | | |
Cash and cash equivalents | | $ | 524,496 | | | $ | 20,958 | |
Accounts receivable, net | | 829,796 | | | 835,121 | |
Materials and supplies | | 143,178 | | | 201,749 | |
NGLs and natural gas in storage | | 227,810 | | | 304,926 | |
Commodity imbalances | | 11,959 | | | 25,267 | |
Other current assets | | 132,536 | | | 82,313 | |
Total current assets | | 1,869,775 | | | 1,470,334 | |
Property, plant and equipment | | | | |
Property, plant and equipment | | 23,072,935 | | | 22,051,492 | |
Accumulated depreciation and amortization | | 3,918,007 | | | 3,702,807 | |
Net property, plant and equipment (Note D) | | 19,154,928 | | | 18,348,685 | |
Investments and other assets | | | | |
Investments in unconsolidated affiliates (Note M) | | 805,032 | | | 861,844 | |
Goodwill and intangible assets (Note E) | | 773,723 | | | 957,833 | |
| | | | |
Other assets | | 475,296 | | | 173,425 | |
Total investments and other assets | | 2,054,051 | | | 1,993,102 | |
Total assets | | $ | 23,078,754 | | | $ | 21,812,121 | |
| | ONEOK, Inc. and Subsidiaries | | | | | ONEOK, Inc. and Subsidiaries | | | | |
CONSOLIDATED BALANCE SHEETS | | | | | CONSOLIDATED BALANCE SHEETS | | | | |
(Continued) | | December 31, | | December 31, | (Continued) | |
| | | December 31, | | December 31, |
| | 2018 | | 2017 | | | 2020 | | 2019 |
Liabilities and equity | | (Thousands of dollars) | Liabilities and equity | | (Thousands of dollars) |
Current liabilities | | |
| | |
| Current liabilities | | | | |
Current maturities of long-term debt (Note F) | | $ | 507,650 |
| | $ | 432,650 |
| Current maturities of long-term debt (Note F) | | $ | 7,650 | | | $ | 7,650 | |
Short-term borrowings (Note F) | | — |
| | 614,673 |
| Short-term borrowings (Note F) | | 0 | | | 220,000 | |
Accounts payable | | 1,118,102 |
| | 1,140,571 |
| Accounts payable | | 719,302 | | | 1,209,900 | |
Commodity imbalances | | 110,197 |
| | 164,161 |
| Commodity imbalances | | 186,372 | | | 104,480 | |
Accrued taxes | | Accrued taxes | | 89,428 | | | 75,422 | |
Accrued interest | | 161,377 |
| | 135,309 |
| Accrued interest | | 245,153 | | | 190,750 | |
Operating lease liability (Note O) | | Operating lease liability (Note O) | | 13,610 | | | 1,883 | |
Other current liabilities | | 211,110 |
| | 179,971 |
| Other current liabilities | | 83,032 | | | 210,213 | |
Total current liabilities | | 2,108,436 |
| | 2,667,335 |
| Total current liabilities | | 1,344,547 | | | 2,020,298 | |
Long-term debt, excluding current maturities (Note F) | | 8,873,334 |
| | 8,091,629 |
| Long-term debt, excluding current maturities (Note F) | | 14,228,421 | | | 12,479,757 | |
Deferred credits and other liabilities | | | | | Deferred credits and other liabilities | |
Deferred income taxes (Note L) | | 219,731 |
| | 52,697 |
| Deferred income taxes (Note L) | | 669,697 | | | 536,063 | |
Operating lease liability (Note O) | | Operating lease liability (Note O) | | 87,610 | | | 13,509 | |
Other deferred credits | | 450,627 |
| | 348,924 |
| Other deferred credits | | 706,081 | | | 536,543 | |
Total deferred credits and other liabilities | | 670,358 |
| | 401,621 |
| Total deferred credits and other liabilities | | 1,463,388 | | | 1,086,115 | |
Commitments and contingencies (Note N) | |
|
| |
|
| Commitments and contingencies (Note N) | | 0 | | 0 |
Equity (Note G) | | |
| | |
| Equity (Note G) | |
ONEOK shareholders’ equity: | | |
| | |
| ONEOK shareholders’ equity: | |
Preferred stock, $0.01 par value: authorized and issued 20,000 shares at December 31, 2018, and at December 31, 2017 | | — |
| | — |
| |
Common stock, $0.01 par value: authorized 1,200,000,000 shares; issued 445,016,234 shares and outstanding 411,532,606 shares at December 31, 2018; issued 423,166,234 shares and outstanding 388,703,543 shares at December 31, 2017 | | 4,450 |
| | 4,232 |
| |
Preferred stock, $0.01 par value: authorized and issued 20,000 shares at December 31, 2020, and at December 31, 2019 | | Preferred stock, $0.01 par value: authorized and issued 20,000 shares at December 31, 2020, and at December 31, 2019 | | 0 | | | 0 | |
Common stock, $0.01 par value: authorized 1,200,000,000 shares; issued 474,916,234 shares and outstanding 444,872,383 shares at December 31, 2020; issued 445,016,234 shares and outstanding 413,239,050 shares at December 31, 2019 | | Common stock, $0.01 par value: authorized 1,200,000,000 shares; issued 474,916,234 shares and outstanding 444,872,383 shares at December 31, 2020; issued 445,016,234 shares and outstanding 413,239,050 shares at December 31, 2019 | | 4,749 | | | 4,450 | |
Paid-in capital | | 7,615,138 |
| | 6,588,878 |
| Paid-in capital | | 7,353,396 | | | 7,403,895 | |
Accumulated other comprehensive loss (Note H) | | (188,239 | ) | | (188,530 | ) | Accumulated other comprehensive loss (Note H) | | (551,449) | | | (374,000) | |
Retained earnings | | — |
| | — |
| Retained earnings | | 0 | | | 0 | |
Treasury stock, at cost: 33,483,628 shares at December 31, 2018, and 34,462,691 shares at December 31, 2017 | | (851,806 | ) | | (876,713 | ) | |
Total ONEOK shareholders’ equity | | 6,579,543 |
| | 5,527,867 |
| |
Noncontrolling interests in consolidated subsidiaries | | — |
| | 157,485 |
| |
Treasury stock, at cost: 30,043,851 shares at December 31, 2020, and 31,777,184 shares at December 31, 2019 | | Treasury stock, at cost: 30,043,851 shares at December 31, 2020, and 31,777,184 shares at December 31, 2019 | | (764,298) | | | (808,394) | |
Total equity | | 6,579,543 |
| | 5,685,352 |
| Total equity | | 6,042,398 | | | 6,225,951 | |
Total liabilities and equity | | $ | 18,231,671 |
| | $ | 16,845,937 |
| Total liabilities and equity | | $ | 23,078,754 | | | $ | 21,812,121 | |
See accompanying Notes to Consolidated Financial Statements.
This page intentionally left blank.
See accompanying Notes to Consolidated Financial Statements.
See accompanying Notes to Consolidated Financial Statements.
ONEOK, INC. AND SUBSIDIARIES
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 natural gas liquidsNGL pipelines to fractionation facilities for further processing.
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. The majority of the pipeline-connected natural gas processing plants in Oklahoma, Kansas, the Texas Panhandle and the Williston Basin are connected to our natural gas liquids gathering systems. We own or have an ownership interest in FERC-regulated natural gas liquidsNGL 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. We have a 50% ownership interest in Overland Pass Pipeline Company, which operates an interstate NGL pipeline originating in Wyoming and Colorado and terminating in Kansas. The majority of the pipeline-connected natural gas processing plants in the Williston Basin, Oklahoma, Kansas and the Texas Panhandle are connected to our NGL gathering systems. We lease rail cars and own and operate truck- and rail-loading and -unloading facilities connected to our NGL fractionation, storage and pipeline assets. We also own FERC-regulated natural gas liquidsNGL distribution and refined petroleum products 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 products, including unleaded gasoline and diesel, from Kansas to Iowa.
Investments in unconsolidated affiliates are accounted for using the equity method if we have the ability to exercise significant influence over operating and financial policies of our investee. Under this method, an investment is carried at its acquisition cost and adjusted each period for contributions made, distributions received and our share of the investee’s comprehensive income. For the investments we account for under the equity method, the premium or excess cost over underlying fair value of net assets is referred to as equity-method goodwill. Impairment of equity investments is recorded when the impairments are other than temporary. These amounts are recorded as investments in unconsolidated affiliates on our accompanying Consolidated Balance Sheets. See Note M for disclosures of our unconsolidated affiliates.
Distributions paid to us from our unconsolidated affiliates are classified as operating activities on our Consolidated Statements of Cash Flows until the cumulative distributions exceed our proportionate share of income from the unconsolidated affiliate since the date of our initial investment. The amount of cumulative distributions paid to us that exceeds our cumulative proportionate share of income in each period represents a return of investment and is classified as an investing activity on our Consolidated Statements of Cash Flows.
recorded or disclosed amounts. In addition, a portion of our revenues and cost of sales and fuel are recorded based on current month prices and estimated volumes and prices.volumes. The estimates are reversed in the following month and recorded withwhen we record actual volumes and prices.
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 areis 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.
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.
See Note B for our fair value measurements disclosures.
delivered to certain customers. However, the term between customer prepayments, completion of our performance obligations, invoicing and receipt of payment due is not significant.
are recognized in revenue as those services are provided and are dependent on the volume transported by our customer, which is at our customer’s discretion. We use the output method based on the passage of time to measure satisfaction of the performance obligation associated with our daily stand-ready services.
contributions in aid of construction received from customers for which revenue is recognized over the contract period. In 2017periods, which range from 5 to 10 years, and prior periods, we recorded these reimbursements as reductions to property, plant and equipment.deferred revenue on NGL storage contracts for which revenue is recognized over a one-year term.
To reduce our exposure to fluctuations in natural gas, NGLs and condensate prices, we periodically enter into futures, forward purchases and sales, options or swap transactions in order to hedge anticipated purchases and sales of natural gas, NGLs and condensate. Interest-rate swaps and treasury lock contracts are used from time to time to manage interest-rate risk. Under certain conditions, we designate our derivative instruments as a hedge of exposure to changes in fair values or cash flows. We formally document all relationships between hedging instruments and hedged items, as well as risk-management objectives and strategies for undertaking various hedge transactions, and methods for assessing and testing correlation and hedge effectiveness. We specifically identify the forecasted transaction that has been designated as the hedged item in a cash flow hedge relationship. We assess the effectiveness of hedging relationships at the inception of the hedge by performingand on an effectiveness analysis on our fair value and cash flow hedging relationshipsongoing basis to determine whether the hedge relationships arehedging relationship is, and is expected to remain, highly effective. Subsequently we perform qualitative assessments. We also document our normal purchases and normal sales transactions that we expect to result in physical delivery and that we elect to exempt from derivative accounting treatment.
The realized revenues and purchase costs of our derivative instruments not considered held for trading purposes and derivatives that qualify as normal purchases or normal sales that are expected to result in physical delivery are reported on a gross basis.
See Notes B and C for disclosures of our fair value measurements and risk-management and hedging activities.activities, respectively.
The interest portion of AFUDC and capitalized interest represent the cost of borrowed funds used to finance construction activities for regulated and nonregulated projects, respectively. We capitalize interest costs during the construction or upgrade of qualifying assets. These costs are recorded as a reduction to interest expense. The equity portion of AFUDC represents the capitalization of the estimated average cost of equity used during the construction of major projects and is recorded in the cost of our regulated properties and as a credit to the allowance for equity funds used during construction.
Our properties are depreciated using the straight-line method over their estimated useful lives. Generally, we apply composite depreciation rates to functional groups of property having similar economic circumstances. We periodically conduct depreciation studies to assess the economic lives of our assets. For our regulated assets, these depreciation studies are completed as a part of our rate proceedings or tariff filings, and the changes in economic lives, if applicable, are implemented prospectively when the new rates are billed.approved. For our nonregulated assets, if it is determined that the estimated economic life
changes, the changes are made prospectively. Changes in the estimated economic lives of our property, plant and equipment could have a material effect on our financial position or results of operations.
Property, plant and equipment on our Consolidated Balance Sheets includes construction work in process for capital projects that have not yet been placed in service and therefore are not being depreciated. Assets are transferred out of construction work in process when they are substantially complete and ready for their intended use.
See Note D for our property, plant and equipment disclosures.
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.
See Notes D, E and M for our long-lived assets, goodwill and intangible assets and investments in unconsolidated affiliates disclosures.disclosures, respectively.
recovered may be required if all or a portion of the regulated operations have rates that are no longer (i) established by independent, third-party regulators and (ii) set at levels that will recover our costs when considering the demand and competition for our services.
We utilize the “with-and-without” approach for intra-period tax allocation for purposes of allocating total tax expense (or benefit) for the year among the various financial statement components.
We file numerous consolidated and separate income tax returns with federal tax authorities of the United States along with the tax authorities of several states. We are not under any United States federal audits or statute waivers at this time.
See Note L for our income taxes disclosures.
For our assets that we are able to make an estimate, the fair value of the liability is added to the carrying amount of the associated asset, and this additional carrying amount is depreciated over the life of the asset. The liability is accreted at the end of each period through charges to operating expense. If the obligation is settled for an amount other than the carrying amount of the liability, we will recognize a gain or loss on settlement. The depreciation and accretion expense are immaterial to our Consolidated Financial Statements.
date have not been significant in relation to our financial position or results of operations, and our expenditures related to environmental matters had no materialsignificant effect on earnings or cash flows during 2018, 20172020, 2019 and 2016.2018. Actual results may differ from our estimates resulting in an impact, positive or negative, on earnings.
See Note N for additional discussion of contingencies.
See Note J for our share-based payments disclosures.
income taxes, allowance for equity funds used during construction, noncash compensation expense, and other noncash items. Prior periods have been adjusted to conform to current presentation. This calculation may not be comparable with similarly titled measures of other companies.
(a) - Derivative assets and liabilities are presented in our Consolidated Balance SheetsSheet on a net basis. We net derivative assets and liabilities when a legally enforceable master-netting arrangement exists between the counterparty to a derivative contract and us. At December 31, 2018,2020, we held no0 cash and posted $0.8$63.1 million of cash with various counterparties, whichincluding $35.1 million of cash collateral that is offsetting derivative net liability positions under master-netting arrangements in the table above. The remaining $28.0 million of cash collateral in excess of derivative net liability positions is included in other current assets in our Consolidated Balance Sheets.Sheet.
(a) - Derivative assets and liabilities are presented in our Consolidated Balance SheetsSheet 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, 2017,2019, we held no0 cash and posted $49.7$8.8 million of cash with various counterparties, including $29.5 million of cash collateral that is offsetting derivative net liability positions under master-netting arrangements in the table above. The remaining $20.2 million of cash collateral in excess of derivative net liability positionswhich is included in other current assets in our Consolidated Balance Sheets.Sheet.
The following table sets forth a reconciliation of our Level 3 fair value measurements for the periods indicated:
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 POPfee with feePOP contracts. Under certain POPfee with feePOP contracts, our fees and POP percentage may increase or decrease if production volumes, delivery pressures or commodity prices change relative to specified thresholds. In certain commodity price environments, our contractual fees on these certain fee with POP contracts may decrease, which impacts the average fee rate in our Natural Gas Gathering and Processing segment. We also are exposed to basis risk between the various production and market locations where we buy and sell commodities. As part of our hedging
strategy, we use the previously described commodity derivative financial instruments and physical-forward contracts to reduce the impact of price fluctuations related to natural gas, NGLs and condensate.
In our Natural Gas Liquids segment, we are primarily exposed to commodity price risk resulting from the relative values of the various NGL products to each other, the value of NGLs in storage and the relative value of NGLs to natural gas. We are also exposed to location price differential risk as a result of the relative value of NGL purchases at one location and sales at another location, primarily related to our optimization and marketing business. 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.
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.
The following table sets forth our property, plant and equipment by property type, for the periods indicated:
The average depreciation rates for our regulated property are set forth, by segment, in the following table for the periods indicated:
We incurred costs for construction work in process that had not been paid at December 31, 2020, 2019 and 2018, 2017 and 2016, of $388.3$151.7 million, $92.4$544.8 million and $83.0$388.3 million, respectively. Such amounts are not included in capital expenditures (less AFUDC and capitalized interest) on the Consolidated Statements of Cash Flows.
(a) - Individual issuances of commercial paper under our commercial paper program generally mature in 90 days or less.
certain lender-approved capital expansion projects). AtIn June 2020, we amended our $2.5 Billion Credit Agreement by, among other things, modifying the leverage ratio so that we may net up to $700 million of cash on hand against our consolidated indebtedness for purposes of calculating the ratio’s numerator for the fiscal quarters ending June 30, 2020, September 30, 2020, and December 31, 2018, due to our acquisition of the remaining 20 percent2020. In October 2020, we acquired additional interest in WTLPGone of our equity investments and a related asset for $195$27 million, thewhich allowed us to elect an acquisition adjustment period under our $2.5 Billion Credit Agreement and, as a result, increased our leverage ratio covenant increased to 5.5 to 1 for the second half of 2018fourth quarter 2020 and first quarter 2019, andthe two following quarters. Thereafter, the covenant will decrease to 5.0 to 1 thereafter.1.
Our $2.5 Billion Credit Agreement includes a $100 million sublimit for the issuance of standby letters of credit and a $200 million sublimit for swingline loans. Under the terms of our $2.5 Billion Credit Agreement, we may request an increase in the size of the facility to an aggregate of $3.5 billion by either commitments from new lenders or increased commitments from existing lenders. Our $2.5 Billion Credit Agreement contains provisions for an applicable margin rate and an annual facility fee, both of which adjust with changes in our credit ratings. Based on our current credit ratings, borrowings, if any, will accrue at LIBOR, or alternate benchmark rate, plus 110 basis points, and the annual facility fee is 15 basis points. We have the option to request an additional one-year extension, subject to lender approval, which may be used for working capital, capital expenditures, acquisitions and mergers, the issuance of letters of credit and for other general corporate purposes. At December 31, 2018,2020, our ratio of indebtedness to adjusted EBITDA was 3.54.6 to 1, and we were in compliance with all covenants under our $2.5 Billion Credit Agreement.
In November 2018, we entered into our $1.5 Billion Term Loan Agreement with a syndicate of banks, which is available to bewas fully drawn until Mayas of June 30, 2019. Our $1.5 Billion Term Loan Agreement matures in November 2021 and bears interest at LIBOR plus 112.5 basis points based on our current credit ratings. The agreement contains an option, which may be exercised up to two times, to extend the term of the loan, in each case, for an additional one-year term subject to approval of the banks. Our $1.5 Billion Term Loan Agreement allows prepayment of all or any portion outstanding, without penalty or premium, and contains substantially the same covenants as those contained in our $2.5 Billion Credit Agreement. As of December 31, 2018, we had borrowings totaling $550 million outstanding under our $1.5 Billion Term Loan Agreement, whichproceeds were used for general corporate purposes, including repayment of existing indebtedness.indebtedness and funding capital expenditures.
In July 2018, we completed an underwritten public offering of $1.25 billion senior unsecured notes consisting of $800 million, 4.55 percent4.55% senior notes due 2028 and $450 million, 5.2 percent5.2% senior notes due 2048. The net proceeds, after deducting underwriting discounts, commissions and offering expenses, were $1.23 billion. The proceeds were used for general corporate purposes, which included repayment of existing indebtedness and funding capital expenditures.
We may redeem our senior notes, in whole or in part, at any time prior to their maturity at a redemption price equal to the principal amount, plus accrued and unpaid interest and a make-whole premium. We may redeem the balance of our senior notes due 2020, 2022, 2023, 2024, 2025, 2026, 2027, 2028 (4.55%), 2029, 2030, 2031, 2041, 2043, 2047, 2048, 2049, 2050 and 20482051 at a redemption price equal to the principal amount, plus accrued and unpaid interest, starting one to six months before the maturity date as stipulated in the respective contract terms. Our senior notes are senior unsecured obligations, ranking equally in right of payment with all of our existing and future unsecured senior indebtedness.
common stock and cash-based awards that can be issued to a participant under the EIP during any year is limited to $0.8 million in value as of the grant date. NoNaN performance unit awards or restricted stock unit awards have been made to nonemployeenon-employee directors, under the EIP or DSCP. Thereand there are no0 options outstanding under the EIP or DSCP.outstanding.
(a) - Volatility was based on historical volatility over three years using daily stock price observations.
We have reserved a total of 11.6 million shares of common stock for issuance under our ONEOK, Inc. Employee Stock Purchase Plan (the ESPP). Subject to certain exclusions, all employees are eligible to participate in the ESPP. Employees can choose to have up
The table above includes the supplemental executive retirement plan obligation. ONEOK has investments included in other assets on the Consolidated Balance Sheets, which totaled $87.7$116.2 million and $93.2$98.9 million at December 31, 20182020 and 2017,2019, respectively, for the purpose of fundingoffsetting the obligation. These assets are excluded from the table above as the assets are maintained in a rabbi trust and are not treated as assets of the supplemental executive retirement plan and are excluded from the table above.plan.
The table below sets forth the amounts in accumulated other comprehensive loss that had not yet been recognized as components of net periodic benefit expense for the periods indicated:
The following table sets forth the weighted-average assumptions used to determine net periodic benefit costs for the periods indicated:
We determine our overall expected long-term rate of return on plan assets based on our review of historical returns and economic growth models.
As part of our risk management for the plans, minimums and maximums have been set for each of the asset classes listed above. All investment managers for the plan are subject to certain restrictions on the securities they purchase and, with the exception of indexing purposes, are prohibited from owning our stock.
The following tables set forth the plan assets by fair value category as of the measurement date for our defined benefit pension and other postretirement benefit plans:
(a) - This category represents securities of the respective market sector from diverse industries.
(b) - This category represents bonds from diverse industries.
(c) - This category represents alternative investments in limited partnerships, which can be redeemed with a 30-day notice with no further restrictions. There are no0 unfunded capital commitments.
(d) - Plan asset investments measured at fair value using the net asset value per share.
(a) - This category represents securities of the respective market sector from diverse industries.
(a) - This category represents securities of the respective market sector from diverse industries.
The expected benefits to be paid are based on the same assumptions used to measure our benefit obligation at December 31, 2018,2020, and include estimated future employee service.
(a) Due primarily to excess of tax over book depreciation.
(a) - Our Natural Gas Liquids segment has regulated and nonregulated operations. Our Natural Gas Liquids segment’s regulated operations had revenues of $1.2 billion, of which $1.1 billion related to salesrevenues within the segment, and cost of sales and fuel of $506.0 million.
(b) - Our Natural Gas Pipelines segment has regulated and nonregulated operations. Our Natural Gas Pipelines segment’s regulated operations had revenues of $266.6 million and cost of sales and fuel of $26.0 million.
None.
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)13a-15(b) and 15d-15(e)15d-15(b) of the Exchange Act.
Not applicable.
Information concerning our executive officers is included in Part I, Item 1, Business, of this Annual Report.
Information on compliance with Section 16(a) of the Exchange Act is set forth in our 20192021 definitive Proxy Statement and is incorporated herein by this reference.
Information concerning the code of ethics, or code of business conduct, is set forth in our 20192021 definitive Proxy Statement and is incorporated herein by this reference.
Information concerning the Audit Committee Financial Experts is set forth in our 20192021 definitive Proxy Statement and is incorporated herein by this reference.
Information concerning the ownership of certain beneficial owners is set forth in our 20192021 definitive Proxy Statement and is incorporated herein by this reference.
Information on certain relationships and related transactions and director independence is set forth in our 20192021 definitive Proxy Statement and is incorporated herein by this reference.
Information concerning the principal accountant’s fees and services is set forth in our 20192021 definitive Proxy Statement and is incorporated herein by this reference.
None.
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on this 26th23rd day of February 2019.2021.