10-K 1 oke10-k2013.htm OKE Q4 2013 10-K OKE 10-K 2013


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2013.
OR
__ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________.
Commission file number   001-13643
ONEOK, Inc.
(Exact name of registrant as specified in its charter)
Oklahoma
73-1520922
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer Identification No.)
 
 
 
100 West Fifth Street, Tulsa, OK
74103
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code   (918) 588-7000
Securities registered pursuant to Section 12(b) of the Act:
Common stock, par value of $0.01
New York Stock Exchange
(Title of each class)
(Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act:  None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes X No__
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes __  No X
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes X  No __
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes X No __
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Registration S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X
 
Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one) Large accelerated filer X Accelerated filer __    Non-accelerated filer __    Smaller reporting company __
 
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes__ No X
 
Aggregate market value of registrant’s common stock held by non-affiliates based on the closing trade price on June 30, 2013, was $8.1 billion.
 
On February 19, 2014, the Company had 207,814,086 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the definitive proxy statement to be delivered to shareholders in connection with the Annual Meeting of Shareholders to be held May 21, 2014, are incorporated by reference in Part III.

1


ONEOK, Inc.
2013 ANNUAL REPORT
 
 
Page No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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.


2


GLOSSARY

The abbreviations, acronyms and industry terminology used in this Annual Report are defined as follows:
AFUDC
Allowance for funds used during construction
Annual Report
Annual Report on Form 10-K for the year ended December 31, 2013
ASU
Accounting Standards Update
Bbl
Barrels, 1 barrel is equivalent to 42 United States gallons
Bbl/d
Barrels per day
BBtu/d
Billion British thermal units per day
Bcf
Billion cubic feet
Bcf/d
Billion cubic feet per day
Bighorn Gas Gathering
Bighorn Gas Gathering, L.L.C.
Bushton Plant
Bushton Natural Gas Processing and Fractionation Plant
CFTC
Commodities Futures Trading Commission
Clean Air Act
Federal Clean Air Act, as amended
Clean Water Act
Federal Water Pollution Control Act Amendments of 1972, as amended
Dodd-Frank Act
Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
DOT
United States Department of Transportation
EBITDA
Earnings before interest expense, income taxes, depreciation and amortization
EPA
United States Environmental Protection Agency
Exchange Act
Securities Exchange Act of 1934, as amended
FASB
Financial Accounting Standards Board
FERC
Federal Energy Regulatory Commission
GAAP
Accounting principles generally accepted in the United States of America
Guardian Pipeline
Guardian Pipeline, L.L.C.
Intermediate Partnership
ONEOK Partners Intermediate Limited Partnership, a wholly owned subsidiary of
ONEOK Partners, L.P.
IRS
Internal Revenue Service
KCC
Kansas Corporation Commission
KDHE
Kansas Department of Health and Environment
LDCs
Local distribution companies
LIBOR
London Interbank Offered Rate
MBbl
Thousand barrels
MBbl/d
Thousand barrels per day
MDth/d
Thousand dekatherms per day
Midwestern Gas Transmission
Midwestern Gas Transmission Company
MMBbl
Million barrels
MMBtu
Million British thermal units
MMBtu/d
Million British thermal units per day
MMcf
Million cubic feet
MMcf/d
Million cubic feet per day
Moody’s
Moody’s Investors Service, Inc.
Natural Gas Act
Natural Gas Act of 1938, as amended
Natural Gas Policy Act
Natural Gas Policy Act of 1978, as amended
NGL products
Marketable natural gas liquid purity products, such as ethane, ethane/propane
mix, propane, iso-butane, normal butane and natural gasoline
NGL(s)
Natural gas liquid(s)
Northern Border Pipeline
Northern Border Pipeline Company
NYMEX
New York Mercantile Exchange
NYSE
New York Stock Exchange
OBPI
ONEOK Bushton Processing, L.L.C., formerly ONEOK Bushton Processing, Inc.

3


OCC
Oklahoma Corporation Commission
OESC
ONEOK Energy Services Company, L.P.
ONE Gas
ONE Gas, Inc.
ONE Gas Credit Agreement
ONE Gas’ $700 million revolving credit agreement dated December 20, 2013
ONEOK
ONEOK, Inc.
ONEOK Credit Agreement
ONEOK’s $300 million revolving credit agreement dated April 5, 2011, as amended
ONEOK Partners
ONEOK Partners, L.P.
ONEOK Partners Credit Agreement
ONEOK Partners’ $1.7 billion revolving credit agreement dated August 1, 2011,
as amended January 31, 2014
ONEOK Partners GP
ONEOK Partners GP, L.L.C., a wholly owned subsidiary of ONEOK and the sole
general partner of ONEOK Partners
OPIS
Oil Price Information Service
OSHA
Occupational Safety and Health Administration
Overland Pass Pipeline Company
Overland Pass Pipeline Company LLC
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
RRC
Railroad Commission of Texas
S&P
Standard & Poor’s Rating Services
SEC
Securities and Exchange Commission
Securities Act
Securities Act of 1933, as amended
VAR
Value-at-Risk
Viking Gas Transmission
Viking Gas Transmission Company
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,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “should,” “goal,” “forecast,” “guidance,” “could,” “may,” “continue,” “might,” “potential,” “scheduled” and other words and terms of similar meaning.  Although we believe that our expectations regarding future events are based on reasonable assumptions, we can give no assurance that such expectations and 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 Operation and “Forward-Looking Statements,” in this Annual Report.


4


PART I

ITEM 1.    BUSINESS

GENERAL

We are a diversified energy company and successor to the company founded in 1906 as Oklahoma Natural Gas Company.  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 the sole general partner and, as of December 31, 2013, own 41.2 percent of ONEOK Partners (NYSE: OKS), one of the largest publicly traded master limited partnerships. Our goal is to provide management and resources enabling ONEOK Partners to execute its growth strategies and allowing us to grow our dividend. ONEOK Partners applies its core capabilities of gathering, processing, fractionating, transporting, storing, marketing and distributing natural gas and NGLs through the rebundling of services across the energy value chains, primarily through vertical integration, in an effort to provide its customers with premium services at lower costs. ONEOK Partners is a leader in the gathering, processing, storage and transportation of natural gas in the United States.  In addition, ONEOK Partners owns one of the nation’s premier natural gas liquids systems, connecting NGL supply in the Mid-Continent and Rocky Mountain regions with key market centers.  At December 31, 2013, our operations included our energy services business, which provides premium natural gas marketing services to its customers across the United States, and our natural gas distribution business, which includes Kansas Gas Service, Oklahoma Natural Gas and Texas Gas Service.

EXECUTIVE SUMMARY

In 2013, we announced plans to separate our natural gas distribution business into a standalone publicly traded company and to wind down our energy services business. ONEOK and its subsidiaries will continue to own the entire general partner interest and limited partner interests in ONEOK Partners, which, together, represented a 41.2 percent ownership interest at December 31, 2013, in ONEOK Partners. Following the separation of the natural gas distribution business and the wind down of our energy services business, our cash flows will primarily be derived from the cash distributions we receive from ONEOK Partners associated with our limited partner and general partner interests, including incentive distribution rights. We expect to distribute in the form of dividends the majority of our cash flows in excess of debt service, income taxes and other operating needs. Subject to board approval, we expect to pay higher dividends following the separation of the natural gas distribution business and as ONEOK Partners’ distributions increase.

Separation of Natural Gas Distribution Business - In January 2014, our board of directors unanimously approved the separation of our natural gas distribution business into a standalone publicly traded company, ONE Gas (NYSE: OGS), which was completed on January 31, 2014. ONE Gas consists of ONEOK’s former Natural Gas Distribution segment that includes Kansas Gas Service, Oklahoma Natural Gas and Texas Gas Service. ONEOK shareholders of record at the close of business on January 21, 2014, retained their current shares of ONEOK stock and received one share of ONE Gas stock for every four shares of ONEOK stock owned. In connection with the separation, we received a cash payment of approximately $1.13 billion from ONE Gas and utilized, or will utilize, the proceeds to repay our outstanding commercial paper and to repay approximately $550 million of long-term debt prior to maturity.

ONE Gas is the largest natural gas distributor in Oklahoma and Kansas and the third largest natural gas distributor in Texas, providing service as a regulated public utility to wholesale and retail customers.  ONE Gas’ largest distribution markets are Oklahoma City and Tulsa, Oklahoma; Kansas City, Wichita and Topeka, Kansas; and Austin and El Paso, Texas.  ONE Gas benefits from rate strategies, including a performance-based rate mechanism in Oklahoma, capital-recovery mechanisms in Kansas and portions of Texas, and cost-of-service adjustments in certain Texas jurisdictions that address investments in rate base and changes in expense. See additional discussion in the “Financial Results and Operating Information” section of our Natural Gas Distribution segment.

Wind-down of Energy Services - As a result of challenging natural gas market industry conditions, in June 2013, we announced an accelerated wind down of our Energy Services segment. Our Energy Services segment no longer fits strategically and has become increasingly smaller on a relative basis because of the market conditions that it has faced and the growth of our other businesses. We will continue to operate our Energy Services segment through the completion of the wind down process that is expected to be completed substantially by March 31, 2014. See additional discussion in the “Financial Results and Operating Information” section of our Energy Services segment.

Market Conditions - Domestic supplies of natural gas, natural gas liquids and crude oil continue to increase from drilling activities focused in crude oil and NGL-rich resource areas. Despite lower commodity prices, North American natural gas production continues to increase at a faster rate than demand, primarily as a result of increased production from

5


nonconventional resource areas such as shale areas.  Producers currently receive higher market prices on a heating-value basis for crude oil and NGLs compared with natural gas. As a result, many producers have focused their drilling activity in NGL-rich shale areas throughout the country that produce crude oil and NGL-rich natural gas rather than areas that produce dry natural gas. ONEOK Partners expects continued demand for midstream infrastructure development to be driven by producers who need to connect emerging production with end-use markets where current infrastructure is insufficient or nonexistent.

Additional infrastructure is needed to gather, process, fractionate, store and transport increasing supplies of natural gas and NGLs.  In response to this increased production and demand for NGL products, ONEOK Partners is investing approximately $6.0 billion to $6.4 billion in new capital projects, including approximately $1.2 billion in new projects and acquisitions announced in 2013. These projects are expected to meet the needs of crude oil, NGL and natural gas producers in the Bakken Shale and Three Forks formations in the Williston Basin, the Niobrara Shale, the Cana-Woodford Shale, Woodford Shale, Mississippian Lime and Granite Wash areas, and the need for additional natural gas liquids infrastructure in the Mid-Continent and Gulf Coast areas that will enhance the distribution of NGL products to meet the increasing petrochemical industry and NGL export demand.  When completed, ONEOK Partners expects these projects to increase volumes in its businesses and generate additional earnings and cash flows, while also increasing commodity-price sensitivity in its natural gas gathering and processing business and fee-based revenues in its natural gas liquids business.

The increased drilling activity and production have resulted in lower NGL prices, as well as reduced price volatility and narrower NGL location and seasonal price differentials for natural gas and NGLs in the markets ONEOK Partners serves. ONEOK Partners expects similar conditions in 2014; however, market conditions may produce periods of higher prices and volatility, as well as wider NGL location and product price differentials. For example, in the fourth quarter 2013, the price of propane increased significantly, and the price differential of propane between the Conway, Kansas, and the Mont Belvieu, Texas, market centers also widened in favor of Conway, Kansas, due to colder than normal weather and lower propane inventory levels. We expect propane prices to remain high through the 2014 winter heating season. Due to success in extracting NGLs, ethane production has increased more rapidly than the petrochemical industry's current capability to consume ethane. ONEOK Partners believes similar market conditions may generally persist until ethylene producers increase their capacity, with the largest number of additions expected to be completed in the next two to four years, to consume additional ethane feedstock volumes through plant modifications and expansions, and the completion of announced new world-scale ethylene capacity.

When economic conditions warrant, certain natural gas processors elect not to recover the ethane component of the natural gas stream, also known as ethane rejection, and instead leave the ethane component in the natural gas stream sold at the tailgate of natural gas processing plants.  Price differentials between ethane and natural gas resulted in ethane rejection at most of ONEOK Partners’ natural gas processing plants and some of  ONEOK Partners’ natural gas liquids business’ customers’ natural gas processing plants connected to its natural gas liquids gathering system in the Mid-Continent and Rocky Mountain regions during 2013, which reduced natural gas liquids volumes gathered, fractionated and transported in its natural gas liquids business and its results of operations. In the near term, ONEOK Partners expects the ethane oversupply may result in volatile ethane prices.

ONEOK Partners expects ethane rejection will persist through much of 2016, after which new world-scale ethylene production capacity is expected to begin coming on line, although market conditions may result in periods where it is economical to recover the ethane component in the natural gas stream. Ethane rejection is expected to have a significant impact on ONEOK Partners’ financial results over this period. However, ONEOK Partners’ natural gas liquids business’ integrated assets enable it to mitigate partially the impact of ethane rejection through minimum volume commitments and its ability to utilize the transportation capacity made available due to ethane rejection to capture additional NGL location price differentials in its optimization activities. In addition, new NGL supply commitments are expected to increase volumes in 2014 through 2016 to mitigate further the impact of ethane rejection on ONEOK Partners’ natural gas liquids business. See additional discussion in the “Financial Results and Operating Information” section.

ONEOK Partners also expects narrow NGL price differentials, with periods of volatility for certain NGLs, between the Conway, Kansas, and Mont Belvieu, Texas, market centers to persist as new fractionators and pipelines from the various NGL-rich shale areas throughout the country, including ONEOK Partners’ growth projects discussed below, continue to alleviate constraints affecting NGL prices and location price differentials between the two market centers. In addition, new natural gas liquids pipeline projects are expected to bring incremental NGL supply from the Rocky Mountain, Marcellus and Utica basins to the Mont Belvieu market center that may affect NGL prices, as well as compete with or displace NGL supply volumes from the Mid-Continent and Rocky Mountain regions where ONEOK Partners’ assets are located. ONEOK Partners’ natural gas liquids business’s capital projects are backed by fee-based supply commitments that ONEOK Partners expects to fill much of its capacity used historically to capture NGL price differentials between the two market centers.


6


Other Significant 2013 Events - During 2013, we paid cash dividends of $1.48 per share, an increase of approximately 17 percent from the $1.27 per share paid during 2012.  In January 2014, we declared a dividend of $0.40 per share ($1.60 per share on an annualized basis), an increase of approximately 11 percent from the $0.36 declared in January 2013.

During 2013, ONEOK Partners paid cash distributions to its limited partners of $2.87 per unit, an increase of approximately 11 percent compared with the $2.59 per unit paid during 2012.  In January 2014, ONEOK Partners GP declared a cash distribution to ONEOK Partners’ limited partners of $0.73 per unit ($2.92 per unit on an annualized basis) for the fourth quarter 2013, an increase of approximately 3 percent compared with the $0.71 declared in January 2013.

In August 2013, ONEOK Partners completed an underwritten public offering of 11.5 million common units at a public offering price of $49.61 per common unit, generating net proceeds of approximately $553.3 million. In conjunction with this issuance, ONEOK Partners GP contributed approximately $11.6 million in order to maintain its 2 percent general partner interest in ONEOK Partners. ONEOK Partners used a portion of the proceeds from its August 2013 equity issuance to repay amounts outstanding under its commercial paper program, and the balance was used for general partnership purposes.

ONEOK Partners has an “at-the-market” equity program for the offer and sale from time to time of its common units up to an aggregate amount of $300 million. The program allows it to offer and sell its common units at prices it deems appropriate through a sales agent. Sales of common units are made by means of ordinary brokers’ transactions on the NYSE, in block transactions, or as otherwise agreed to between ONEOK Partners and the sales agent. ONEOK Partners is under no obligation to offer and sell common units under the program. During the year ended December 31, 2013, ONEOK Partners sold common units through this program that resulted in net proceeds, including ONEOK Partners GP’s contribution to maintain its 2 percent general partner interest in ONEOK Partners, of approximately $36.1 million. ONEOK Partners used the proceeds for general partnership purposes.

In September 2013, ONEOK Partners completed an underwritten public offering of $1.25 billion of senior notes, generating net proceeds of approximately $1.24 billion. ONEOK Partners used the proceeds to pay down commercial paper and for general partnership purposes.

In September 2013, ONEOK Partners completed the acquisition for $305 million of certain natural gas gathering and processing, and natural gas liquids facilities in Converse and Campbell counties, Wyoming, in the NGL-rich Niobrara Shale formation of the Powder River Basin. These assets consist primarily of a 50 MMcf/d natural gas processing facility, the Sage Creek plant, and related natural gas gathering and natural gas liquids infrastructure. Included in the acquisition were supply contracts providing for long-term acreage dedications from producers in the area, which are structured with POP and fee-based contractual terms.

During 2013, we relied primarily on operating cash flows, commercial paper and distributions from ONEOK Partners to fund our short-term liquidity and capital requirements. Our cash flow sources and requirements are expected to change significantly following the separation of the natural gas distribution business and the wind down of the energy services business. Our primary source of cash inflows are expected to be distributions from ONEOK Partners, and our primary cash outflows are expected to be dividends to our shareholders. The cash distributions that we expect to receive from ONEOK Partners should provide sufficient resources to finance our operations and quarterly cash dividends. We do not expect any principal debt-service requirements after the first quarter 2014 until our next long-term debt maturity in 2022. ONEOK Partners anticipates that its cash flows generated from operations, existing capital resources and ability to obtain financing will enable it to maintain its current and planned levels of operations.  Additionally, ONEOK Partners expects to fund its capital expenditures with proceeds from short- and long-term debt, the issuance of equity and operating cash flows.

In December 2013, we amended the ONEOK Credit Agreement effective upon the separation of our natural gas distribution business on January 31, 2014, which reduced the size of our facility to $300 million from $1.2 billion and extended the maturity to January 2019.

In December 2013, ONEOK Partners amended its Partnership Credit Agreement, effective January 31, 2014, to increase the size of the facility to $1.7 billion from $1.2 billion and extended the maturity to January 2019. The facility is available to provide liquidity for working capital, capital expenditures and for other general partnership purposes.

See Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operation, for more information on our growth projects, results of operations, liquidity and capital resources.


7


BUSINESS STRATEGY

Our primary business strategy is to maximize dividend payout while maintaining prudent financial strength and flexibility, with a focus on safe, reliable and environmentally responsible operations for our customers, employees, contractors and the public through the following:
Provide reliable energy and energy-related services in a safe and environmentally responsible manner to our stakeholders through our ownership in ONEOK Partners - environmental, safety and health issues continue to be a primary focus for us, and our emphasis on personal and process safety has produced improvements in the key indicators we track.  We also continue to look for ways to reduce our environmental impact by conserving resources and utilizing more efficient technologies;
Maximize dividend payout while maintaining financial strength and flexibility - during 2013, cash dividends paid per share increased 17 percent compared with the prior year. During 2013, ONEOK Partners’ cash distributions increased by 28 cents per unit, an increase of approximately 11 percent compared with 2012; ONEOK Partners announced new capital projects and acquisitions of $1.2 billion, increasing its total growth program to approximately $6.0 billion to $6.4 billion. These projects are expected to meet the needs of NGL and natural gas producers in the Williston Basin, Niobrara Shale, Cana-Woodford Shale, Woodford Shale, Mississippian Lime and Granite Wash areas, and for additional natural gas liquids infrastructure in the Mid-Continent and Gulf Coast areas that will enhance the distribution of NGL products to meet the increasing petrochemical industry and NGL export demand. When completed, these projects are anticipated to provide additional earnings and cash flows. In 2014, we intend to distribute the majority of our cash flows in excess of debt service, income taxes and other operating needs in the form of dividends. ONEOK Partners’ balance sheet remains strong, and ONEOK Partners will seek to maintain its investment-grade credit ratings; and
Attract, select, develop and retain a diverse group of employees to support strategy execution - we continue to execute on our recruiting strategy that targets colleges, universities and vocational-technical schools in our operating areas.  We also continue to focus on employee development efforts with our current employees.

NARRATIVE DESCRIPTION OF BUSINESS

At December 31, 2013, we report operations in the following business segments:
ONEOK Partners;
Natural Gas Distribution; and
Energy Services.

ONEOK Partners

Overview - ONEOK Partners is a diversified master limited partnership involved in the gathering, processing, storage and transportation of natural gas in the United States.  In addition, ONEOK Partners owns one of the nation’s premier natural gas liquids systems, which gathers, fractionates, stores and transports NGLs and connects NGL supply in the Mid-Continent and Rocky Mountain regions with key market centers.

We own approximately 92.8 million common and Class B limited partner units, and the entire 2 percent general partner interest, which, together, represent a 41.2 percent ownership interest in ONEOK Partners at December 31, 2013.  We receive distributions from ONEOK Partners on our common and Class B units and our 2 percent general partner interest, which includes our incentive distribution rights.  See Note Q of the Notes to Consolidated Financial Statements in this Annual Report for discussion of our incentive distribution rights.

We and ONEOK Partners maintain significant financial and corporate governance separations.  We seek to receive increasing cash distributions as a result of our investment in ONEOK Partners.  To aid in understanding the important business and financial characteristics of our ONEOK Partners segment at December 31, 2013, the following describes its business with reference to its underlying activities.

Natural gas gathering and processing business - ONEOK Partners’ natural gas gathering and processing business provides nondiscretionary services to producers that include gathering and processing of natural gas produced from crude oil and natural gas wells.  Unprocessed natural gas is compressed and gathered through pipelines to processing facilities where volumes are aggregated, treated and processed to remove water vapor, solids and other contaminants, and to extract NGLs in order to provide marketable natural gas, commonly referred to as residue gas.  The residue gas, which consists primarily of methane, is compressed and delivered to natural gas pipelines for transportation to end users. When the NGLs are separated from the

8


unprocessed natural gas at the processing plants, the NGLs are in the form of a mixed, unfractionated NGL stream that is delivered to natural gas liquids gathering pipelines for transportation to natural gas liquids fractionators.

ONEOK Partners gathers and processes natural gas in the Mid-Continent region, which includes the NGL-rich Cana-Woodford Shale, Woodford Shale, Granite Wash area and the Mississippian Lime formation of Oklahoma and Kansas and the Hugoton and Central Kansas Uplift Basins of Kansas.  It also gathers and/or processes natural gas in two producing basins in the Rocky Mountain region: the Williston Basin, which spans portions of Montana and North Dakota and includes the oil-producing, NGL-rich Bakken Shale and Three Forks formations; and the Powder River Basin of Wyoming, which includes the NGL-rich Frontier, Turner, Sussex and Niobrara Shale formations. ONEOK Partners also gathers coal-bed methane, or dry natural gas, in the Powder River Basin that does not require processing or NGL extraction in order to be marketable; dry natural gas is gathered, compressed and delivered into a downstream pipeline or marketed for a fee.

Revenue from the natural gas gathering and processing business is derived primarily from commodity and fee-based contracts. ONEOK Partners generally gathers and processes natural gas under the following types of contracts:
POP with fee - These commodity contracts allow ONEOK Partners to retain a percentage of the proceeds from the sale of residue gas, condensate, and/or NGLs and to charge fees for gathering, treating, compressing and processing the producer’s natural gas.  POP with fee contracts expose ONEOK Partners to commodity price and volumetric risks but economically align it with the producer because ONEOK Partners’ benefits from higher commodity prices, reduced costs and improved efficiencies. This type of contract represented approximately 85 percent and 81 percent of contracted volumes for 2013 and 2012, respectively.  There are a variety of factors that directly affect ONEOK Partners, POP margins, including:
the percentage of proceeds retained by ONEOK Partners that represent NGL, condensate and residue natural gas sales that it receives as payment for the services it provides;
volumes produced that affects its fee revenue;
transportation and fractionation costs incurred on the NGLs it retains; and
the natural gas, crude oil and NGL prices received for its retained products.
Fee - ONEOK Partners is paid a fee for the services it provides, based on volumes gathered, processed, treated and/or compressed. ONEOK Partners’ fee-based contracts expose it to volumetric risk and represent approximately 15 percent and 19 percent of contracted volumes for 2013 and 2012, respectively.

ONEOK Partners expects its capital projects in its natural gas gathering and processing business will continue to provide additional revenues, earnings and cash flows as they are completed. ONEOK Partners expects its natural gas liquids and natural gas commodity price sensitivity within this business to increase in the future as its capital projects are completed and volumes increase under POP contracts with its customers. ONEOK Partners uses commodity derivative instruments and physical-forward contracts to mitigate its sensitivity to fluctuations in the natural gas, crude oil and NGL prices received for its share of volumes.

Natural gas liquids business - ONEOK Partners’ natural gas liquids business owns and operates facilities that gather, fractionate, treat and distribute NGLs and store NGL products primarily in Oklahoma, Kansas, Texas and the Rocky Mountain region where it provides nondiscretionary services to producers of NGLs.   ONEOK Partners owns or has an ownership interest in FERC-regulated natural gas liquids gathering and distribution pipelines in Oklahoma, Kansas, Texas, Montana, North Dakota, Wyoming and Colorado, and terminal and storage facilities in Missouri, Nebraska, Iowa and Illinois. ONEOK Partners’ natural gas liquids business also owns FERC-regulated natural gas liquids distribution and refined petroleum products pipelines in Kansas, Missouri, Nebraska, Iowa, Illinois and Indiana that connect its Mid-Continent assets with Midwest markets, including Chicago, Illinois.  The majority of the pipeline-connected natural gas processing plants in Oklahoma, Kansas and the Texas Panhandle, which extract unfractionated NGLs from unprocessed natural gas, are connected to its gathering systems.  ONEOK Partners’ natural gas liquids business owns and operates truck- and rail-loading and -unloading facilities that interconnect with its NGL fractionation and pipeline assets.  In April 2013, ONEOK Partners’ natural gas liquids business began transporting unfractionated NGLs from natural gas processing plants in the Williston Basin on its Bakken NGL Pipeline. These unfractionated NGLs previously were transported by rail to ONEOK Partners’ Mid-Continent natural gas liquids fractionation facilities. ONEOK Partners’ natural gas liquids business continues to use its rail terminal facilities in its NGL marketing activities.

Most natural gas produced at the wellhead contains a mixture of NGL components, such as ethane, propane, iso-butane, normal butane and natural gasoline.  The NGLs that are separated from the natural gas stream at the natural gas processing plants remain in a mixed, unfractionated form until they are gathered, primarily by pipeline, and delivered to fractionators where the NGLs are separated into NGL products.  These NGL products are then stored or distributed to ONEOK Partners’ natural gas liquids business’ customers, such as petrochemical manufacturers, heating fuel users, ethanol producers, refineries and propane

9


distributors.  ONEOK Partners’ natural gas liquids business also purchases NGLs and condensate from third parties, as well as from ONEOK Partners’ natural gas gathering and processing business.

Revenues from the natural gas liquids business are derived primarily from nondiscretionary fee-based services provided to ONEOK Partners’ customers and physical optimization of its natural gas liquids assets. Its fee-based services have increased due primarily to new supply connections, expansion of existing connections and its previously completed capital projects, including the Bakken-NGL Pipeline, Cana-Woodford Shale and Granite Wash projects, and expansion of its NGL fractionation capacity.  The sources of revenue are categorized as exchange services, optimization and marketing, pipeline transportation, isomerization and storage, which are defined as follows:
Exchange services’ activities - ONEOK Partners primarily gathers, fractionates and treats unfractionated NGLs for a fee, thereby converting them into marketable NGL products that are stored and shipped to a market center or customer-designated location. Many of these exchange volumes are under contracts with minimum volume commitments.
Optimization and marketing activities - ONEOK Partners utilizes its assets, contract portfolio and market knowledge to capture location, product and seasonal price differentials.  ONEOK Partners transports NGL products between Conway, Kansas and Mont Belvieu, Texas, to capture the location price differentials between the two market centers.  ONEOK Partners’ natural gas liquids storage facilities are also utilized to capture seasonal price variances. A growing portion of its marketing activities serves truck and rail markets.
Pipeline transportation activities - ONEOK Partners transports unfractionated NGLs, NGL products and refined petroleum products, primarily under its FERC-regulated tariffs.  Tariffs specify the maximum rates ONEOK Partners charges its customers and the general terms and conditions for NGL transportation service on its pipelines.
Isomerization activities - ONEOK Partners captures the product price differential when normal butane is converted into the more valuable iso-butane at its isomerization unit in Conway, Kansas.  Iso-butane is used in the refining industry to increase the octane of motor gasoline.
Storage activities - ONEOK Partners storage activities consist primarily of fee-based NGL storage services at its Mid-Continent and Gulf Coast storage facilities.

Natural gas pipelines business - ONEOK Partners’ natural gas pipelines business owns and operates regulated natural gas transmission pipelines and natural gas storage facilities.  ONEOK Partners also provides interstate natural gas transportation and storage services in accordance with Section 311(a) of the Natural Gas Policy Act.

ONEOK Partners’ FERC-regulated interstate natural gas pipeline assets transport natural gas through pipelines in North Dakota, Minnesota, Wisconsin, Illinois, Indiana, Kentucky, Tennessee, Oklahoma, Texas and New Mexico.  ONEOK Partners’ intrastate natural gas pipeline assets in Oklahoma transport natural gas through the state and have access to the major natural gas producing areas in the state, including the Cana-Woodford Shale, Woodford Shale, Granite Wash and Mississippian Lime.  ONEOK Partners also has access to the major natural gas producing areas, including the Mississippian Lime formation in south central Kansas.  In Texas, its intrastate natural gas pipelines are connected to the major natural gas producing areas in the Texas Panhandle, including the Granite Wash area and the Delaware and Cline producing areas in the Permian Basin, and transport natural gas throughout the western portion of Texas, including the Waha Hub where other pipelines may be accessed for transportation to western markets, the Houston Ship Channel market to the east and the Mid-Continent market to the north. ONEOK Partners owns underground natural gas storage facilities in Oklahoma and Texas that are connected to its intrastate natural gas pipeline assets. ONEOK Partners also has underground natural gas storage facilities in Kansas.

ONEOK Partners’ revenues from its natural gas pipelines are derived typically from fee-based services provided to its customers. Its revenues are generated from the following types of fee-based contracts:
Firm service - Customers can reserve a fixed quantity of pipeline or storage capacity for the terms of their contract. Under this type of contract, the customer pays a fixed fee for a specified quantity regardless of their actual usage. The customer then typically pays incremental fees, known as commodity charges, that are based upon the actual volume of natural gas they transport or store, and/or ONEOK Partners may retain a specified volume of natural gas in-kind for fuel.  Under the firm-service contract, the customer generally is guaranteed access to the capacity they reserve; and
Interruptible service - Customers with interruptible service transportation and storage agreements may utilize available capacity after firm-service requests are satisfied or on an as-available basis.  Interruptible service customers typically are assessed fees, such as a commodity charge, based on their actual usage, and/or ONEOK Partners may retain a specified volume of natural gas in-kind for fuel.  Under the interruptible service contract, the customer is not guaranteed use of ONEOK Partners’ pipelines and storage facilities unless excess capacity is available.

Market Conditions and Seasonality - Supply - Natural gas, crude oil and NGL supply is affected by producer drilling activity, which is sensitive to commodity prices, drilling rig availability, exploration success, operating capability, the NGL content of

10


the natural gas that is produced and processed, access to capital and regulatory control.  Crude oil prices and advances in horizontal drilling and completion technology have had a positive impact on drilling activity in the crude oil and NGL-rich shale and other nonconventional resource areas, providing an offset to the less favorable supply projections in some of the dry natural gas conventional resource areas. Extreme weather conditions can impact the volume of natural gas gathered and processed and NGL volumes gathered, transported and fractionated. Freeze-offs are a phenomenon where water produced from natural gas freezes at the wellhead or within the gathering system. This causes a temporary interruption in the flow of natural gas. This is more prevalent in the Rocky Mountain region where temperatures tend to be colder than in the Mid-Continent region but can occur throughout ONEOK Partners’ systems. All of ONEOK Partners’ operations may be affected by other weather conditions that may cause a loss of electricity or prevent access to certain locations that affect a producer’s ability to complete wells or ONEOK Partners’ ability to connect these wells to its systems.

In the Rocky Mountain region, Williston Basin volumes continue to grow as well connections from drilling completions increase, driven primarily by producer development of Bakken Shale and Three Forks formation crude oil wells, which also produce associated natural gas containing significant quantities of NGLs.  However, ONEOK Partners’ natural gas gathering and processing business has experienced declines in natural gas volumes gathered in the portions of the Powder River Basin that produce dry natural gas.

In the Mid-Continent region, ONEOK Partners has a significant amount of natural gas gathering and processing assets in western Oklahoma and southwest Kansas.  ONEOK Partners expects continued drilling activity in the Cana-Woodford Shale and Granite Wash areas of western Oklahoma and the Mississippian Lime formation of Oklahoma and Kansas to offset the volumetric declines in most conventional wells that supply its natural gas gathering and processing facilities.

NGL supply for ONEOK Partners’ natural gas liquids business depends on the pace of crude oil and natural gas drilling activity by producers, the decline rate of existing production and the NGL content of the natural gas that is produced and processed.  ONEOK Partners’ natural gas liquids business has seen rapid NGL supply growth within its operating footprint as producers continue to aggressively drill in a number of NGL-rich resource areas in the Mid-Continent and Rocky Mountain regions.  ONEOK Partners expects the overall supply of NGLs to continue to increase, as well as demand for its fee-based services, as a result of the development of these resource areas.  Many new natural gas processing plants are being constructed in North Dakota, Wyoming, Oklahoma and the Texas Panhandle to process NGL-rich natural gas being produced in the Williston Basin, Niobrara Shale, Cana-Woodford Shale, Granite Wash, Woodford Shale and the Mississippian Lime areas.  The unfractionated NGLs that ONEOK Partners’ natural gas liquids business transports are gathered primarily from natural gas processing plants in Oklahoma, Kansas, Texas and the Rocky Mountain region.  Its gathering and fractionation operations receive NGLs from a variety of processors and pipelines, including affiliates, located in these regions.

ONEOK Partners’ natural gas gathering and processing and natural gas liquids businesses also are affected by operational or market-driven changes that affect the output of natural gas processing plants to which ONEOK Partners’ NGL assets are connected.  The price differential between the typically higher valued NGL products and the value of natural gas, particularly the price differentials between ethane and natural gas, has influenced the volume of ethane natural gas processing plants make available to be gathered in ONEOK Partners’ natural gas liquids business. When economic conditions warrant, certain natural gas processors elect not to recover the ethane component of the natural gas stream, also known as ethane rejection, and instead leave the ethane component in the natural gas stream sold at the tailgate of natural gas processing plants.  Price differentials between ethane and natural gas resulted in ethane rejection at most of ONEOK Partners’ natural gas processing plants and some of  ONEOK Partners’ natural gas liquids business’ customers’ natural gas processing plants connected to its natural gas liquids gathering system in the Mid-Continent and Rocky Mountain regions during 2013, which reduced natural gas liquids volumes gathered, fractionated and transported in its natural gas liquids business and its results of operations.

ONEOK Partners expects ethane rejection will persist through much of 2016, after which new world-scale ethylene production capacity is expected to begin coming on line, although market conditions may result in periods where it is economical to recover the ethane component in the natural gas stream. Ethane rejection is expected to have a significant impact on the financial results of ONEOK Partners’ natural gas liquids business over this period. However, its integrated natural gas liquids assets enable it to mitigate partially the impact of ethane rejection through minimum volume agreements and its ability to utilize the transportation capacity made available due to ethane rejection to capture additional NGL location price differentials in its optimization activities. In addition, new NGL supply commitments are expected to increase volumes in 2014 through 2016 to mitigate further the impact of ethane rejection on ONEOK Partners’ natural gas liquids business. See additional discussion in the “Financial Results and Operating Information” section in our ONEOK Partners segment.

Natural gas, natural gas liquids and crude oil transportation constraints may also affect the output of natural gas processing plants in total or for specific NGL products in the future.  During 2013, ONEOK Partners’ natural gas liquids business experienced limited reductions of supply related to changes in plant output as a result of transportation constraints.

11



ONEOK Partners’ interstate natural gas pipelines access supply from major producing regions in the Mid-Continent, Rocky Mountain, Gulf Coast, the Northeast and Canada. Supply volumes from nontraditional natural gas production areas, such as into the Northeast, may compete with and displace volumes from the Mid-Continent, Rocky Mountains and Canadian supply sources in our markets.

Demand - Demand for natural gas gathering and processing services is aligned typically with the production of natural gas from natural gas resource areas or the associated natural gas from wells drilled in crude oil resource areas.  Gathering and processing are nondiscretionary services that producers require to market their natural gas and NGL production.  As producers continue to develop NGL-rich shale and other resource areas, ONEOK Partners expects demand for its natural gas gathering and processing services to increase.

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, fractionation and distribution services.  Natural gas and propane are subject to weather-related seasonal demand. Other NGL products are affected by economic conditions and the demand associated with the various industries that utilize the commodity, 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 used by the petrochemical industry to produce chemical products, such as plastics, rubber and synthetic fibers. Several petrochemical companies announced new plants, plant expansions, additions or enhancements that improve the light-NGL feed capability of their facilities due primarily to the increased supply and attractive price of ethane, compared with crude oil-based alternatives, as a petrochemical feedstock in the United States. The demand is expected to increase significantly in two to four years when the new petrochemical plants are completed. In addition, international demand for propane is expected to continue affecting the NGL market in the future.  ONEOK Partners expects this increase in demand for NGLs will provide opportunities to increase fee-based earnings in its exchange services, storage activities and marketing activities.

Demand for natural gas pipeline transportation service and natural gas storage is related directly to its access to supply and the demand for natural gas in the markets that ONEOK Partners’ natural gas pipelines and storage facilities serve. It is affected by weather, the economy and natural gas and NGL price volatility.  ONEOK Partners’ natural gas pipelines primarily serve end-users, such as local natural gas distribution companies, electric-generation companies, large industrial companies, municipalities and irrigation customers that require natural gas to operate their businesses and generally are not affected by location price differentials. However, narrower location price differentials may affect demand for ONEOK Partners’ services from natural gas marketers as discussed below under “Commodity Prices.”  Demand for ONEOK Partners’ natural gas pipelines services is also affected as coal-fired electric generators are retired and replaced with alternative power generation fuels such as natural gas. Recent EPA regulations on emissions from coal-fired electric-generation plants, including the Maximum Achievable Control Technology Standards and the Mercury and Air Toxics Standards, have increased the demand for natural gas as a fuel for electric generation, as well as related transportation and storage services. The demand for natural gas and related transportation and storage services is expected to increase over the next several years as these regulations continue to be implemented. The effect of weather on ONEOK Partners’ natural gas pipelines operations is discussed below under “Seasonality.” The strength of the economy directly affects manufacturing and industrial companies that consume natural gas.  Commodity price volatility can influence producers’ decisions related to the production of natural gas and the amount of NGLs processed from natural gas.

Commodity Prices - Crude oil, natural gas and NGL prices can be volatile due to changes in market conditions.  Commodity prices can also be affected by demand for products from the petrochemical industry and other consumers, storage injection and withdrawal rates, and available storage capacity.  The increase in natural gas supply from shale gas development has caused natural gas prices to remain low and natural gas location and seasonal price differentials to remain narrow across the regions where ONEOK Partners operates.  However, an increase in crude oil prices and the abundance of NGLs produced from the development of NGL-rich shale resource areas have made producing NGL feedstocks for the petrochemical industry more profitable.  ONEOK Partners is exposed to commodity-price risk in its natural gas gathering and processing business as a result of receiving commodities in exchange for services, primarily on POP contracts, and in its natural gas liquids business from the NGLs it purchases and sells.

The increased drilling activities and production have resulted in lower NGL prices, as well as minimal price volatility and narrower NGL location and seasonal price differentials for natural gas and NGLs in the markets we serve during 2013. We expect similar conditions in 2014; however, market conditions may produce periods of higher prices and volatility, as well as wider NGL location and product price differentials. For example, in the fourth quarter 2013, the price of propane increased significantly, and the price differential of propane between the Conway, Kansas, and the Mont Belvieu, Texas, market centers also widened in favor of Conway, Kansas, due to colder than normal weather and lower propane inventory levels. We expect

12


propane prices to remain high through the 2014 winter heating season. The abundance of NGLs produced from the development of shale and other resource areas has made NGL feedstocks to the petrochemical industry less costly.  Ethane production has increased more rapidly than the petrochemical industry's current capability to consume the increase in supplies. This oversupplied situation contributed to low ethane prices in 2013. While petrochemical demand remained strong in 2013 and ethane inventory levels decreased, ONEOK Partners believes the oversupply of ethane may persist until ethylene producers increase their capacity to consume additional ethane feedstock volumes through plant modifications and expansions and the completion of announced new world-scale ethylene capacity. In the near term, ONEOK Partners expects continued ethane price volatility and ethane rejection to balance supply and demand.

ONEOK Partners is also exposed to market risk associated with the location price differentials between receipt and delivery points along its natural gas and natural gas liquids pipelines, also known as location differentials. Its natural gas liquids business is exposed to market 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 its NGL purchases, sales and margins related to its NGL exchange, storage, transportation and optimization activities.  When natural gas prices are higher relative to NGL prices, NGL production may decline due to ethane rejection, which could negatively affect ONEOK Partners’ exchange services and transportation revenues.  When the NGL location price differential between the Mid-Continent and Gulf Coast market centers is narrow, optimization opportunities and NGL shipments may decline, resulting in a decline in earnings from our NGL optimization and marketing activities. During 2013, strong production and supply growth from the development of NGL-rich areas, increased demand in the Mid-Continent region and increased capacity available on pipelines that connect the Mid-Continent and Gulf Coast market centers resulted in NGL price differentials remaining narrow between the Mid-Continent market center at Conway, Kansas, and the Gulf Coast market center at Mont Belvieu, Texas.  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.

To minimize the risk from market price fluctuations of natural gas, NGLs and crude oil, ONEOK Partners uses commodity derivative instruments such as futures, swaps and physical-forward contracts to manage commodity-price risk associated with existing or anticipated purchase and sale agreements, existing physical natural gas or NGLs in storage and location price differentials.

Seasonality - Our ONEOK Partners segment’s products and services are subject to weather-related seasonal demand.  Cold temperatures typically increase demand for natural gas and propane, which are used to heat homes and businesses.  Extreme warm or cold temperatures typically drive demand for natural gas used for natural gas-fired electric generation needed to meet the electricity-generation demand required to heat and cool residential and commercial properties.  Precipitation levels also can impact the demand for natural gas that is used to fuel irrigation activity in the Mid-Continent region and demand for propane used to fuel crop-drying activity.  Demand for butanes and natural gasoline, which are used primarily by the refining industry as blending stocks for motor fuel, denaturant for ethanol and diluents for crude oil, may also be subject to some variability during seasonal periods when certain government restrictions on motor fuel blending products are in place.  During periods of peak demand for a certain commodity, prices for that product typically increase, which may influence natural gas processing and NGL fractionation decisions. During late 2013, ONEOK Partners’ natural gas liquids business experienced high propane demand for crop drying, international exports and home heating due to colder than normal winter weather.

Competition - ONEOK Partners’ natural gas and natural gas liquids businesses compete directly with other companies for natural gas and NGL supply, markets and services.  Competition for natural gas transportation services continues to increase as new infrastructure projects are completed and the FERC and state regulatory bodies continue to encourage additional competition in the natural gas markets.  Competition is based primarily on fees for services, quality of services provided, current and forward natural gas and NGL prices and proximity to supply areas and markets.  ONEOK Partners believes that the location and integration of its assets enable it to compete effectively.

ONEOK Partners’ natural gas gathering and processing business competes for natural gas supplies with major integrated oil companies, independent exploration and production companies that have gathering and processing assets, pipeline companies and their affiliated marketing companies, national and local natural gas gatherers and processors, and marketers in the Mid-Continent and Rocky Mountain regions. ONEOK Partners’ natural gas liquids business competes with other fractionators, intrastate and interstate pipeline companies, storage providers, gatherers and transporters for NGL supplies in the Rocky Mountain, Mid-Continent and Gulf Coast regions.  The factors that typically affect ONEOK Partners’ ability to compete for natural gas and NGL supply are:
quality of services provided;
producer drilling activity;
the petrochemical industry’s level of capacity utilization and feedstock requirements;

13


products retained and/or fees charged under its contracts;
current and forward NGL prices;
location of its assets relative to those of its competitors;
location of its assets relative to drilling activity;
proximity to NGL supply areas and markets;
efficiency and reliability of its operations;
operating pressures maintained on its gathering systems; and
receipt and delivery capabilities that exist for natural gas and NGLs in each pipeline system, processing plant, fractionator and storage location.

ONEOK Partners is responding to these factors by making capital investments to access new supply by increasing gathering, processing, fractionation and distribution capacity; increasing storage, withdrawal and injection capabilities; and improving natural gas processing efficiency and reducing operating costs.  ONEOK Partners’ competitors are constructing or have completed new natural gas gathering and processing facilities and natural gas liquids pipelines and fractionators to address the growing natural gas and NGL supply and petrochemical demand.  ONEOK Partners is also evaluating opportunities to maximize earnings and renegotiating low-margin contracts to improve margins and reduce risk. When completed, ONEOK Partners’ growth projects and those of its competitors are expected to alleviate constraints between the Conway, Kansas, and Mont Belvieu, Texas, natural gas liquids market centers. As a result, we expect the narrow location price differentials between the Mid-Continent and Gulf Coast market centers to continue. In addition, new natural gas liquids pipeline projects are expected to bring incremental NGL supply from the Rocky Mountain, Marcellus and Utica basins to the Mont Belvieu market center that may affect NGL prices, as well as compete with or displace NGL supply volumes from the Mid-Continent and Rocky Mountain regions where our assets are located. We believe ONEOK Partners’ natural gas gathering and processing, NGL fractionation, pipelines and storage assets are located strategically, connecting diverse supply areas to market centers.

Government Regulation - The FERC traditionally has maintained that a natural gas processing plant is not a facility for the transportation or sale for resale 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 ONEOK Partners’ natural gas processing operations or facilities, ONEOK Partners’ natural gas processing plants are primarily involved in extracting NGLs and, therefore, ONEOK Partners believes its natural gas processing plants are exempt from FERC jurisdiction. The Natural Gas Act also exempts natural gas gathering facilities from the jurisdiction of the FERC.  ONEOK Partners believes its natural gas gathering facilities and operations meet the criteria used by the FERC for nonjurisdictional gathering facility status.  Interstate transmission facilities remain subject to FERC jurisdiction.  The FERC has distinguished historically between these two types of facilities, either interstate or intrastate, on a fact-specific basis.  ONEOK Partners also transports residue gas from its 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, in various 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.

The operations and revenues of ONEOK Partners’ natural gas liquids pipelines are regulated by various state and federal government agencies.  Its interstate natural gas liquids pipelines are regulated by the FERC, which has authority over the terms and conditions of service and rates, including depreciation and amortization policies, and initiation of service.  In Oklahoma, Kansas and Texas, ONEOK Partners’ intrastate natural gas liquids pipelines that provide common carrier service are subject to the jurisdiction of the OCC, KCC and RRC, respectively.

PHMSA has asserted jurisdiction over certain portions of ONEOK Partners’ natural gas liquids fractionation facilities in Bushton, Kansas, that ONEOK Partners believes are not subject to its jurisdiction. ONEOK Partners has objected to the scope of PHMSA’s jurisdiction and is seeking resolution of this matter. We do not anticipate that the cost of compliance will have a material adverse effect on our consolidated results of operations, financial position or cash flows.

ONEOK Partners’ interstate natural gas pipelines are regulated under the Natural Gas Act and Natural Gas Policy Act, which give the FERC jurisdiction to regulate virtually all aspects of the pipeline activities.  ONEOK Partners’ intrastate natural gas transportation assets in Oklahoma, Kansas and Texas are regulated by the OCC, KCC and RRC, respectively.  ONEOK Partners has flexibility in establishing natural gas transportation rates with customers.  However, there are maximum rates that ONEOK Partners can charge its customers in Oklahoma and Kansas.

Recent EPA regulations on emissions from coal-fired electric-generation plants, including the Maximum Achievable Control Technology Standards and the Mercury and Air Toxics Standards, have increased the demand for natural gas as a fuel for

14


electric generation, as well as related transportation and storage services. The demand for natural gas and related transportation and storage services is expected to increase over the next several years as these regulations continue to be implemented.

In November 2012, the FERC initiated a review of Viking Gas Transmission’s rates pursuant to Section 5 of the Natural Gas Act.  The parties reached agreement on the terms of a settlement that provides for a 2 percent reduction in transportation rates.  The settlement was approved by the FERC in December 2013, and the revised rates became effective January 1, 2014.

See further discussion in the “Environmental and Safety Matters” section.

Unconsolidated Affiliates - Our ONEOK Partners segment has investments in unconsolidated affiliates that include Northern Border Pipeline, Overland Pass Pipeline Company, three partnerships that operate natural gas gathering systems located primarily in the Powder River of Wyoming and other investments.  Northern Border Pipeline is a leading transporter of natural gas imported from Canada into the United States.  Overland Pass Pipeline Company operates an interstate natural gas liquids pipeline system that transports natural gas liquids from the Rocky Mountain region to the Mid-Continent NGL market center.

See Note P of the Notes to Consolidated Financial Statements in this Annual Report for additional discussion of ONEOK Partners’ unconsolidated affiliates.

Natural Gas Distribution

Separation of Natural Gas Distribution Business - On January 31, 2014, we completed the separation of our natural gas distribution business into a standalone publicly traded company, ONE Gas.  ONE Gas consists of ONEOK’s former Natural Gas Distribution segment that includes Kansas Gas Service, Oklahoma Natural Gas and Texas Gas Service.  See additional discussion in Note U of the Notes to the Consolidated Financial Statements. The Natural Gas Distribution segment has been classified as discontinued operations effective February 1, 2014.

Overview - Our former Natural Gas Distribution segment provides natural gas distribution services to more than 2 million customers in Oklahoma, Kansas and Texas through Oklahoma Natural Gas, Kansas Gas Service and Texas Gas Service, serving residential, commercial, industrial and transportation customers in all three states.  In addition, our former LDCs serve wholesale and public authority customers.  Its operations are subject to regulations and oversight of various regulatory agencies.

Our operating results were affected primarily by the number of customers, usage and the ability to collect service fees that provided a reasonable rate of return on our investment and recovery of our cost of service.  Natural gas costs were passed through to our customers based on the actual cost of natural gas purchased by the respective natural gas distribution company and related expenses, including transportation and storage costs.  Substantial fluctuations in natural gas sales could occur from year to year without materially or adversely impacting our former LDCs’ net margin, since the fluctuations in natural gas costs affected natural gas sales and cost of gas by an equivalent amount.

Oklahoma Natural Gas, Kansas Gas Service and Texas Gas Service distribute natural gas as public utilities to approximately 87 percent, 69 percent and 14 percent of the natural gas distribution customers in Oklahoma, Kansas and Texas, respectively. Natural gas sold to residential and commercial customers as a percentage of our former LDC’s total natural gas sales by state is presented in the table below:
 
Oklahoma
Kansas
Texas
Residential
82%
80%
69%
Commercial
17%
19%
22%

Market Conditions and Seasonality - Natural gas supply requirements are affected by weather conditions.  In addition, economic conditions affect the requirements of our former LDCs’ commercial and industrial customers.  Natural gas usage per residential customer may decline as customers change their consumption patterns in response to a variety of factors including:  
more volatile and higher natural gas prices;
customers improving the energy efficiency of existing homes by replacing doors and windows, adding insulation and replacing appliances with more efficient ones;
more energy-efficient construction; and
fuel switching.


15


In each jurisdiction in which our former natural gas distribution segment operated, changes in customer-usage profiles were considered in the periodic redesign of rates.

In managing our natural gas supply portfolios, we partially mitigated price volatility, using a combination of physical and financial derivatives and natural gas in storage.  We had natural gas financial hedging programs authorized by the regulatory authorities in each state in which our former LDCs do business.  We did not utilize financial derivatives for speculative purposes nor did we have trading operations associated with our former Natural Gas Distribution segment.  We utilized 57.3 Bcf of contracted storage capacity in 2013, which allowed natural gas to be purchased during the off-peak season and stored for use in the winter periods.

Demand - See discussion below under “Seasonality” for factors affecting demand for our former natural gas distribution business.

Seasonality - Natural gas sales to residential and commercial customers are seasonal, as a substantial portion of their natural gas requirements are for heating.  Accordingly, the volume of natural gas sales is higher normally during the months of November through March than in other months of the year.  The impact on margins for our former LDCs resulting from weather temperatures that are above or below normal is offset partially through weather-normalization adjustment (WNA) mechanisms.  These adjustments have been approved by the regulatory authorities for our Oklahoma, Kansas and certain Texas service territories.  WNAs allow us to increase customer billing to offset lower gas usage when weather is warmer than normal and decrease customer billing to offset higher gas usage when weather is colder than normal.

Government Regulation - Rates charged for natural gas transportation services by the LDCs in our former Natural Gas Distribution segment are established by the OCC for Oklahoma Natural Gas and by the KCC for Kansas Gas Service.  Texas Gas Service is subject to regulatory oversight by the various municipalities that it serves, which have primary jurisdiction in their respective areas. Rates in unincorporated areas of Texas and all appellate matters are subject to regulatory oversight by the RRC.  Natural gas supply costs for our former LDCs are passed on to its customers through a purchased-gas cost-adjustment mechanism.  Our former LDCs did not make a profit on the cost of natural gas.

See further discussion in the “Environmental and Safety Matters” section.

Energy Services

Overview - In June 2013, we announced we would discontinue our Energy Services segment through an accelerated wind down process. Our Energy Services segment has faced challenging natural gas market conditions that showed no signs of improving. Increased natural gas supply and infrastructure, coupled with lower natural gas price volatility and narrowed seasonal and location natural gas price differentials has resulted in limited opportunities to generate revenues to cover our fixed costs on contracted storage and transportation capacity. We executed agreements in 2013 to release a significant portion of our nonaffiliated natural gas transportation and storage contracts to third parties. In addition, pursuant to a request for proposal, our Energy Services segment assigned contracts for 18.0 Bcf of storage capacity leased from an affiliate to our Natural Gas Distribution segment effective June 2013. We expect the Energy Services segment to be classified as discontinued operations, effective April 1, 2014, when substantially all operations of the segment will have ceased.

As a result of the accelerated wind down, in 2013 we recorded noncash charges of approximately $138.6 million, before taxes, which were recorded in cost of sales and fuel in our Consolidated Statements of Income. We expect future cash expenditures associated with the released transportation and storage capacity from the wind down of our Energy Services segment to be approximately $80 million on an after-tax basis, which consist of approximately $33 million in 2014, $24 million in 2015, $13 million in 2016 and $10 million during the period from 2017 through 2023.

During the wind down process, we retained 23.5 Bcf of contracted natural gas storage capacity of which 20.5 will expire by March 31, 2014. In the first quarter 2014, we assigned the remaining 3.0 Bcf of natural gas storage capacity to a third party, effective April 1, 2014, and we expect to record an additional noncash charge of approximately $1.7 million, before taxes. We will utilize this capacity through March 31, 2014, to serve our contracted premium services customers by providing natural gas supply and risk-management services for natural gas and electric utilities and industrial customers. Premium services volumes, revenues and cost of sales decreased materially as we have realigned our business operations with the remaining contracted capacity. Our premium services include next-day and no-notice natural gas delivery services. Next-day services allow our customers to call on additional natural gas supply up to an amount agreed upon in a service contract and expect delivery the following day. No-notice services allow customers to call on additional natural gas supply and expect immediate delivery.  We also provide weather-related protection and other custom solutions based on our customers’ specific needs.


16


Government Regulation - Our Energy Services segment purchases natural gas for resale at negotiated rates in interstate commerce.  As such, it has been granted by FERC an automatic blanket certificate of public convenience and necessity authorizing such sales.  This is a limited certificate that does not subject our Energy Services segment to any other regulation of FERC under its Natural Gas Act jurisdiction.  Holders of blanket marketing certificates are subject to certain reporting and document retention requirements.

SEGMENT FINANCIAL INFORMATION

Operating Income, Customers and Total Assets - See Note S of the Notes to Consolidated Financial Statements in this Annual Report for disclosure by segment of our operating income and total assets and for a discussion of revenues from external customers.

Other

Through ONEOK Leasing Company, L.L.C. and ONEOK Parking Company, L.L.C., we own a parking garage and an office building (ONEOK Plaza) 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.

FINANCIAL MARKETS LEGISLATION

The Dodd-Frank Act represents a far-reaching overhaul of the framework for regulation of United States financial markets. The CFTC has issued final regulations for most of the provisions of the Dodd-Frank Act, and we have implemented measures to comply with the regulations that are applicable to our businesses. ONEOK Partners continues to participate in financial markets for hedging certain risks inherent in our business, including commodity-price and interest-rate risks. Although the impact to date has not been material, ONEOK Partners continues to monitor proposed regulations and the impact the regulations may have on its business and risk-management strategies in the future.

ENVIRONMENTAL AND SAFETY MATTERS

Additional information about our environmental matters is included in Note R of the Notes to Consolidated Financial Statements in this Annual Report.

Environmental Matters - We are subject to multiple historical preservation, wildlife 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, wetland preservation, hazardous materials transportation, and pipeline and facility construction.  These laws and regulations require us to obtain and/or comply with a wide variety of environmental clearances, registrations, licenses, permits and other approvals.  Failure to comply with these laws, regulations, licenses and permits may expose us to fines, penalties and/or interruptions in our operations that could be material to our results of operations.  For example, if a leak or spill of hazardous substances or petroleum products occurs from pipelines or facilities that we own, operate or otherwise use, we could be held jointly and severally liable for all resulting liabilities, including response, investigation and cleanup costs, which could affect materially our results of operations and cash flows.  In addition, emissions controls and/or other regulatory or permitting mandates under the Clean Air Act and other similar federal and state laws could require unexpected capital expenditures at our facilities. We cannot assure that existing environmental statutes and regulations will not be revised or that new regulations will not be adopted or become applicable to us.

In June 2013, the Executive Office of the President of the United States issued the President’s Climate Action Plan, which includes, among other things, plans for further regulatory actions to reduce carbon emissions from various sources. The impact of any such regulatory actions on our facilities and operations is unknown. Revised or additional statutes or regulations that result in increased compliance costs or additional operating restrictions could have a significant impact on our business, financial position, results of operations and cash flows.


17


Pipeline Safety - We are subject to PHMSA regulations, including pipeline 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.  In January 2012, The Pipeline Safety, Regulatory Certainty and Job Creation Act of 2011 was signed into law.  The law increased maximum penalties for violating federal pipeline safety regulations and directs the DOT and Secretary of Transportation to conduct further review or studies on issues that may or may not be material to us. These issues include but are not limited to the following:
an evaluation on whether hazardous natural gas liquids and natural gas pipeline integrity-management requirements should be expanded beyond current high-consequence areas;
a review of all natural gas and hazardous natural gas liquids gathering pipeline exemptions;
a verification of records for pipelines in class 3 and 4 locations and high-consequence areas to confirm maximum allowable operating pressures; and
a requirement to test previously untested pipelines operating above 30 percent yield strength in high-consequence areas.

The potential capital and operating expenditures related to this legislation, the associated regulations or other new pipeline safety regulations are unknown.

Air and Water Emissions - The Clean Air Act, the Clean Water Act, and analogous state laws and/or regulations promulgated thereunder, 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.

Federal, state and regional initiatives to measure and regulate greenhouse gas emissions are underway.  We monitor all relevant federal and state legislation to assess the potential impact on our operations.  The EPA’s Mandatory Greenhouse Gas Reporting Rule requires annual greenhouse gas emissions reporting from affected facilities and the carbon dioxide emissions equivalents for the natural gas delivered by us to our natural gas distribution customers who are not otherwise required to report their own emissions and the emissions equivalents for all NGLs produced by ONEOK Partners as if all of these products were combusted, even if they are used otherwise.

Our 2012 total reported emissions were approximately 64.9 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 emissions 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 greenhouse gas emissions, including carbon dioxide and methane. Likewise, the EPA may institute additional regulatory rulemaking associated with greenhouse gas emissions from the oil and gas industry. At this time, no rule or legislation has been enacted that assesses any costs, fees or expenses on any of these emissions.

The EPA’s “Tailoring Rule” regulates greenhouse gas emissions at new or modified facilities that meet certain criteria. Affected facilities are required to review best available control technology, conduct air-quality and impact analyses and public reviews with respect to such emissions.  At current emissions threshold levels, this rule has had a minimal impact on our existing facilities.  The EPA has stated it will consider lowering the threshold levels over the next five years, which could increase the impact on our existing facilities; however, potential costs, fees or expenses associated with the potential adjustments are unknown.

The EPA’s rule on air-quality standards, titled “National Emissions Standards for Hazardous Air Pollutants for Reciprocating Internal Combustion Engines,” also known as RICE NESHAP, initially included a compliance date in 2013.  Subsequent industry appeals and settlements with the EPA have extended timelines for compliance associated with the final RICE NESHAP rule. While the rule could require capital expenditures for the purchase and installation of new emissions-control equipment, we do not expect these expenditures will have a material impact on our results of operations, financial position or cash flows.

In July 2011, the EPA issued a proposed rule that would change the air emissions New Source Performance Standards, also known as NSPS, and Maximum Achievable Control Technology requirements applicable to the oil and natural gas industry, including natural gas production, processing, transmission and underground storage sectors. In April 2012, the EPA released

18


the final rule, which includes new NSPS and air toxic standards for a variety of sources within natural gas processing plants, oil and natural gas production facilities and natural gas transmission stations. The rule also regulates emissions from the hydraulic fracturing of wells for the first time. The EPA’s final rule reflects significant changes from the proposal issued in 2011 and allows for more manageable compliance options. The NSPS final rule became effective in October 2012, but the dates for compliance vary and depend in part upon the type of affected facility and the date of construction, reconstruction or modification.

In March 2013, the EPA issued proposed rulemaking to amend the NSPS for the crude oil and natural gas industry, pursuant to various industry comments, administrative petitions for reconsideration and/or judicial appeals of portions of the NSPS final rule. The rule was most recently amended again in September 2013, and the EPA has indicated that further amendments may be issued in 2014. Based on the amendments and our understanding of pending stakeholder responses to the NSPS rule, we do not expect future capital, operations and maintenance costs resulting from compliance with the regulation to be material. However, the EPA may issue additional responses, amendments and/or policy guidance on the final rule, which could alter our present expectations. Generally, the NSPS rule will require expenditures for updated emissions controls, monitoring and record-keeping requirements at affected facilities in the crude oil and natural gas industry. We do not expect these expenditures will have a material impact on our results of operations, financial position or cash flows.

CERCLA - The federal Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), also commonly known as Superfund, imposes strict, joint and several liability, without regard to fault or the legality of the original act, on certain classes of “persons” (defined under CERCLA) who caused and/or contributed to the release of a hazardous substance into the environment.  These persons include, but are not limited to, the owner or operator of a facility where the release occurred and/or companies that disposed or arranged for the disposal of the hazardous substances found at the facility. Under CERCLA, these persons may be liable for the costs of cleaning up the hazardous substances released into the environment, damages to natural resources and the costs of certain health studies. We do not expect our responsibilities under CERCLA will have a material impact on our results of operations, financial position or cash flows.

Chemical Site Security - The United States Department of Homeland Security (Homeland Security) released an interim rule in April 2007 that requires companies to provide reports on sites where certain chemicals, including many hydrocarbon products, are stored.  We completed the Homeland Security assessments, 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, four of our facilities have been given a Tier 4 rating.  Facilities receiving a Tier 4 rating are required to complete Site Security Plans and possible physical security enhancements.  We do not expect the Site Security Plans and possible security enhancements cost to have a material impact on our results of operations, financial position or cash flows.

Pipeline Security - 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.

Environmental Footprint - Our environmental and climate change strategy focuses on minimizing the impact of our operations on the environment. These strategies include:  (i) developing and maintaining an accurate greenhouse gas 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 liquids 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.

We participate in the EPA’s Natural Gas STAR Program to voluntarily reduce methane emissions.  We continue to focus on maintaining low rates of lost-and-unaccounted-for natural gas through expanded implementation of best practices to limit the release of natural gas during pipeline and facility maintenance and operations.

EMPLOYEES

At February 1, 2014, we employed 1,927 people.


19


EXECUTIVE OFFICERS

All executive officers are elected annually by our Board of Directors and each serves until such person resigns, is removed or is otherwise disqualified to serve or until such officer’s successor is duly elected.  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
 
61

 
2014 to present
 
Chairman of the Board, ONEOK and ONEOK Partners
Chairman of the Board
 
 
 
2012 to 2014
 
Chairman and Chief Executive Officer, ONEOK and ONEOK Partners
 
 
 
 
2011
 
Chairman, President and Chief Executive Officer, ONEOK
 
 
 
 
2011
 
Vice Chairman of the Board of Directors, ONEOK
 
 
 
 
2010 to 2011
 
President and Chief Executive Officer, ONEOK
 
 
 
 
2010 to 2011
 
Chairman, President and Chief Executive Officer, ONEOK Partners
 
 
 
 
2007 to 2009
 
Chief Executive Officer, ONEOK
 
 
 
 
2007 to 2009
 
Chairman and Chief Executive Officer, ONEOK Partners
Terry K. Spencer
 
54

 
2014 to present
 
President and Chief Executive Officer, ONEOK and ONEOK Partners
President and Chief Executive Officer
 
 
 
2012 to 2014
 
President, ONEOK and ONEOK Partners
 
 
 
 
2010 to present
 
Member of the Board of Directors, ONEOK Partners
 
 
 
 
2009 to 2011
 
Chief Operating Officer, ONEOK Partners
 
 
 
 
2007 to 2009
 
Executive Vice President, Natural Gas Liquids, ONEOK Partners
Robert F. Martinovich
 
56

 
2014 to present
 
Executive Vice President, Commercial, ONEOK and ONEOK Partners
Executive Vice President, Commercial
 
2013 to 2014
 
Executive Vice President, Operations, ONEOK and ONEOK Partners
 
 
 
 
2012
 
Executive Vice President, Chief Financial Officer and Treasurer, ONEOK and ONEOK Partners
 
 
 
 
2011 to 2012
 
Member of the Board of Directors, ONEOK Partners
 
 
 
 
2011
 
Senior Vice President, Chief Financial Officer and Treasurer, ONEOK and ONEOK Partners
 
 
 
 
2009 to 2011
 
Chief Operating Officer, ONEOK
 
 
 
 
2007 to 2009
 
President, Gathering and Processing, ONEOK Partners
Wesley J. Christensen
 
60

 
2014 to present
 
Senior Vice President, Operations, ONEOK and ONEOK Partners
Senior Vice President, Operations
 
 
 
2011 to 2014
 
Senior Vice President, Operations, ONEOK Partners
 
 
 
 
2007 to 2011
 
Senior Vice President, Natural Gas Liquids Operations
Stephen W. Lake
 
50

 
2012 to present
 
Senior Vice President, General Counsel and Assistant Secretary, ONEOK and ONEOK Partners
Senior Vice President, General Counsel
and Assistant Secretary
 
2011
 
Senior Vice President, Associate General Counsel and Assistant Secretary, ONEOK and ONEOK Partners
 
 
 
 
2008 to 2011
 
Executive Vice President and General Counsel, McJunkin Red Man Corporation
Derek S. Reiners
 
42

 
2013 to present
 
Senior Vice President, Chief Financial Officer and Treasurer, ONEOK and ONEOK Partners
Senior Vice President, Chief Financial Officer and
Treasurer
 
2009 to 2012
 
Senior Vice President and Chief Accounting Officer, ONEOK and ONEOK Partners
 
 
 
 
2004 to 2009
 
Partner, Grant Thornton LLP
Sheppard F. Miers III
 
45

 
2013 to present
 
Vice President and Chief Accounting Officer, ONEOK and ONEOK Partners
Vice President and Chief Accounting Officer
 
 
 
2009 to 2012
 
Vice President and Controller, ONEOK Partners
 
 
 
 
2005 to 2009
 
Vice President, ONEOK
Dandridge L. Harrison
 
60

 
2012 to present
 
Senior Vice President, Administrative Services and Corporate Relations, ONEOK and ONEOK
Partners
Senior Vice President, Administrative Services
and Corporate Relations
 
 
 
2008 to 2012
 
Vice President, Investor Relations and Public Affairs, ONEOK and 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, Governance Guidelines, Partnership Agreement and the written charter of our Audit Committee are also available on our website, and we will provide copies of these documents upon request.  Our website and any contents thereof are not incorporated by reference into this report.

We also make available on our website the Interactive Data Files required to be submitted and posted pursuant to Rule 405 of Regulation S-T.

ITEM 1A.    RISK FACTORS

Our investors should consider the following risks that could affect us and our business.  Although we have tried to discuss key factors, our investors need to be aware that other risks may prove to be important in the future.  New risks may emerge at any

20


time, and we cannot predict such risks or estimate the extent to which they may affect our financial performance.  Investors should carefully consider 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 Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

RISK FACTORS INHERENT IN OUR BUSINESS

Market volatility and capital availability could affect adversely our business.

The capital and global credit markets have experienced volatility and disruption in the past.  In many cases during these periods, the capital markets have exerted downward pressure on equity values and reduced the credit capacity for certain companies.  Our ability to grow could be constrained if we do not have regular access to the capital and global credit markets.  Similar or more severe levels of global market disruption and volatility may have an adverse affect 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 cost and increasingly restrictive covenants.

Our operating 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 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 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 customers, which, in turn, could have 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 conditions in the United States or other key markets, remain uncertain or persist, spread or deteriorate further, we may experience material impacts on our business, financial condition, results of operations and liquidity.

Our cash flow depends heavily on the earnings and distributions of ONEOK Partners.

Our partnership interest in ONEOK Partners is our largest cash-generating source.  Therefore, our cash flow is heavily dependent upon the ability of ONEOK Partners to make distributions to its partners.  A significant decline in ONEOK Partners’ earnings and/or cash distributions could have a corresponding negative impact on us.  For information on the risk factors inherent in the business of ONEOK Partners, see the section below entitled “Additional Risk Factors Related to ONEOK Partners’ Business” and Item 1A, Risk Factors in the ONEOK Partners’ Annual Report.

Some of our nonregulated businesses have a higher level of risk than our regulated businesses.

Some of our nonregulated operations, which include ONEOK Partners’ natural gas gathering and processing business, most of its natural gas liquids business and our energy services business, have a higher level of risk than our regulated operations, which include ONEOK Partners’ natural gas pipelines business and a portion of its natural gas liquids business.  We and ONEOK Partners expect to continue investing in natural gas and natural gas liquids projects and other related projects, some or all of which may involve nonregulated businesses or assets.  These projects could involve risks associated with operational factors, such as competition and dependence on certain suppliers and customers, and financial, economic and political factors, such as rapid and significant changes in commodity prices, the cost and availability of capital and counterparty risk, including the inability of a counterparty, customer or supplier to fulfill a contractual obligation.

Terrorist attacks directed at our facilities could affect adversely our business.

Since the terrorist attacks on September 11, 2001, the United States government has issued warnings that energy assets, specifically 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 targets our facilities, those of our customers and, in some cases, those of other pipelines, could have a material adverse effect on our business.

Our businesses are subject to market and credit risks.

We are exposed to market and credit risks in all of our operations.  To minimize the risk of commodity price fluctuations, we periodically enter into derivative transactions to hedge anticipated purchases and sales of natural gas, NGLs, crude oil, fuel requirements and firm transportation commitments.  Interest-rate swaps are also used to manage interest-rate risk. However, financial derivative instrument contracts do not eliminate the risks.  Specifically, such risks include commodity price changes,

21


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 are subject to the risk of loss resulting from nonpayment and/or nonperformance by customers and counterparties of our Energy Services segment.  The customers of our Energy Services segment are predominantly LDCs, industrial customers, natural gas producers and marketers that may experience deterioration of their financial condition as a result of changing market conditions or financial difficulties that could impact their creditworthiness or ability to pay for our services.  During the wind down process, if we fail to assess adequately the creditworthiness of existing or future customers, unanticipated deterioration in their creditworthiness and any resulting nonpayment and/or nonperformance could affect adversely results of operations for our Energy Services segment.  In addition, if any of our Energy Services segment’s customers or counterparties filed for bankruptcy protection, we may not be able to recover amounts owed, which could impact materially and adversely the results of operations for our Energy Services segment.

We may not be able to make additional strategic acquisitions or investments.

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.

If we are unable to make strategic investments and acquisitions, we may be unable to grow.

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 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.

We may engage in acquisitions, divestitures and other strategic transactions, the success of which may impact our results of operations.

We may engage in acquisitions, divestitures and other strategic transactions.  If we are unable to integrate successfully businesses that we acquire with our existing business, our results of operations may be affected materially and adversely. Similarly, we may from time to time divest portions of our business, which may also affect materially and adversely our results of operations.

Our established risk-management policies and procedures may not be effective, and employees may violate our risk-management policies.

22



We have developed and implemented a set of policies and procedures that involve both our senior management and the Audit Committee of our Board of Directors to assist us in managing risks associated with, among other things, the marketing, trading and risk-management activities associated with our business segments.  Our risk 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 presence 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 affect on our earnings, financial position or cash flows.

Our indebtedness could impair our financial condition and our ability to fulfill our obligations.

As of December 31, 2013, we had total indebtedness for borrowed money of approximately $1.7 billion, which excludes the debt of ONEOK Partners.  Our indebtedness could have significant consequences.  For example, it could:
make it more difficult for us to satisfy our obligations with respect to our senior notes and our other indebtedness due to the increased debt-service obligations, which could, in turn, result in an event of default on such other indebtedness or our 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 flow from operations to debt-service payments, reducing the availability of cash for working capital, capital expenditures, acquisitions, 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.

We are not prohibited under the indentures governing our 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 revolving debt agreements with banks 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 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.

We are subject to risks that could limit our access to capital, thereby increasing our costs and affecting adversely our results of operations.

We have grown rapidly in the past as a result of acquisitions.  Future acquisitions may require additional capital.  If we are unable to access capital at competitive rates, our strategy of enhancing the earnings potential of our existing assets, including through acquisitions of complementary assets or businesses, will 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) market prices for natural gas, NGLs and other hydrocarbons; (iv) the overall health of the energy and related industries; (v) our ability to maintain our investment-grade credit ratings; and (vi) our capital structure.  Much of our business is capital intensive, and achievement of our long-term growth targets is dependent, at least in part, upon our ability to access capital at rates and on terms we determine to be attractive.  If our ability to access capital becomes constrained significantly, our interest costs will likely increase and our financial condition and future results of operations could be harmed significantly.
 

23


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 postretirement welfare plans that provide postretirement medical and life insurance benefits to certain employees who retire with at least five years of 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, see Note N 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 on the value of our pension and postretirement benefit plan assets.  In these circumstances, additional cash contributions to our pension plans may be required.

Federal, state and local jurisdictions may challenge our tax return positions.

The positions taken in our federal and state tax return filings require significant judgments, use of estimates and the interpretation and application 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.

The separation of ONE Gas could result in substantial tax liability.

We have received a private letter ruling from the IRS substantially to the effect that, for U.S. federal income tax purposes, the separation and certain related transactions qualify under Sections 355 and/or 368 of the U.S. Internal Revenue Code of 1986, as amended.  If the factual assumptions or representations made in the request for the private letter ruling prove to have been inaccurate or incomplete in any material respect, then we will not be able to rely on the ruling.  Furthermore, the IRS does not rule on whether a distribution such as the separation satisfies certain requirements necessary to obtain tax-free treatment under section 355 of the Code.  The private letter ruling was based on representations by us that those requirements were satisfied, and any inaccuracy in those representations could invalidate the ruling.  In connection with the separation, we obtained an opinion of outside legal and tax counsel, substantially to the effect that, for U.S. federal income tax purposes, the separation and certain related transactions qualify under Sections 355 and 368 of the Code.  The opinion relies on, among other things, the continuing validity of the private letter ruling and various assumptions and representations as to factual matters made by us which, if inaccurate or incomplete in any material respect, would jeopardize the conclusions reached by such counsel in its opinion.  The opinion will not be binding on the IRS or the courts, and there can be no assurance that the IRS or the courts would not challenge the conclusions stated in the opinion or that any such challenge would not prevail.

Although we control ONEOK Partners, we may have conflicts of interest with ONEOK Partners that could subject us to claims that we have breached our fiduciary duty to ONEOK Partners and its unitholders.

We are the sole general partner and own 41.2 percent of ONEOK Partners.  Conflicts of interest may arise between us and ONEOK Partners and its unitholders.  In resolving these conflicts, we may favor our own interests and the interests of our affiliates over the interests of ONEOK Partners and its unitholders as long as the resolution does not conflict with the ONEOK Partners’ partnership agreement or our fiduciary duties to ONEOK Partners and its unitholders.

Our use of financial instruments to hedge interest-rate risk may result in reduced income.

We utilize financial instruments to mitigate our exposure to interest-rate fluctuations. Hedging instruments that are used to reduce our exposure to interest-rate fluctuations could expose us to risk of financial loss where we have contracted for variable-rate swap instruments to hedge fixed-rate instruments and the variable rate exceeds the fixed rate.  In addition, these hedging arrangements may limit the benefit we would otherwise receive if we had contracted for fixed-rate swap agreements to hedge variable-rate instruments and the variable rate falls below the fixed rate.

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 and intangible assets with indefinite useful lives for impairment on an annual basis or when events or circumstances occur indicating that goodwill might be impaired.  Long-lived

24


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 ONEOK Partners accounts 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 natural gas production continues to decline in areas of the Powder River Basin where coal-bed methane, or dry natural gas, is produced, ONEOK Partners could be unable to recover the carrying value of its assets and equity investments in these areas. If ONEOK Partners determines that an impairment is indicated, it would be required to take an immediate noncash charge to earnings with a correlative effect on our equity and balance sheet leverage as measured by consolidated debt to total capitalization.

A failure in our operational systems or cyber security attacks on any of our facilities, or those of third parties, may affect adversely our financial results.

Our businesses are dependent upon our operational systems to process a large amount of data and complex transactions.  If any of our financial, operational or other data processing systems fail or have other significant shortcomings, our financial results could be affected adversely.  Our 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 may 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 computer programs to help run our financial and operations organizations, and this may subject our business to increased risks.  Any future cyber security attacks that affect our facilities, our customers and any financial data could have a material adverse on our businesses.  In addition, cyber attacks on our customer and employee data may result in a financial loss and may impact negatively our reputation.
 
Third-party systems on which we rely could also suffer operational system failure.  Any of these occurrences could disrupt one or more of our businesses, result in potential liability or reputational damage or otherwise have an adverse affect on our financial results.

Cyber-attacks 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.

Changes in interest rates could affect adversely our business.

We use both fixed- and variable-rate debt, and we are exposed to market risk due to the floating interest rates on our short-term borrowings.  From time to time, we use interest-rate derivatives to hedge interest obligations on specific debt issuances, including anticipated debt issuances.  These hedges may be ineffective, and our results of operations, cash flows and financial position could be affected adversely by significant fluctuations or increases or decreases in interest rates from current levels.

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 distribution.

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 difficulty of attracting new 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 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 distribution to unitholders.

We are subject to strict regulations at many of our facilities regarding employee safety, and failure to comply with these regulations could affect adversely financial results.

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 occupational exposure to regulated substances could expose us to civil or

25


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.

ADDITIONAL RISK FACTORS RELATED TO ONEOK PARTNERS’ BUSINESS

The volatility of natural gas, crude oil and NGL prices could affect adversely ONEOK Partners’ cash flows.

A significant portion of ONEOK Partners’ revenues are derived from the sale of commodities that are received as payment for natural gas gathering and processing services, for the transportation and storage of natural gas, and for the sale of NGLs and NGL products in ONEOK Partners’ natural gas liquids business.  Commodity prices have been volatile and are likely to continue to be so in the future.  The prices ONEOK Partners receives for its commodities are subject to wide fluctuations in response to a variety of factors beyond ONEOK Partners’ 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 natural gas liquids 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;
overall domestic and global economic conditions;
the price of natural gas, crude oil, NGL and liquefied natural gas imports and exports;
the effect of worldwide energy-conservation measures; and
the impact of new supplies, new pipelines, processing and fractionation facilities on location price differentials.

These external factors and the volatile nature of the energy markets make it difficult to estimate reliably future prices of commodities and the impact commodity price fluctuations have on ONEOK Partners’ customers and their need for its services. As commodity prices decline, ONEOK Partners is paid less for its commodities, thereby reducing its cash flow.  NGL volumes could decline if it becomes uneconomical for natural gas processors to recover the ethane component of the natural gas stream as a separate product. In addition, crude-oil and natural gas production could also decline due to lower prices.

Measurement adjustments on ONEOK Partners’ pipeline system can be affected 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 ONEOK Partners’ assets.  The quantification and resolution of measurement adjustments are complicated by several factors including: (1) the significant number (i.e., thousands) of meters that ONEOK Partners uses throughout its natural gas and natural gas liquids systems; (2) varying qualities of natural gas in the streams gathered and processed and the mixed nature of NGLs gathered and fractionated through ONEOK Partners’ systems; and (3) variances in measurement that are inherent in metering technologies.  Each of these factors may contribute to measurement adjustments that can occur on ONEOK Partners’ systems, which could affect negatively its earnings and cash flows.

Increased competition could have a significant adverse financial impact on ONEOK Partners.

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.  ONEOK Partners’ ability to compete also depends on a number of other factors, including competition from other companies for its existing customers, the efficiency, quality and reliability of the services it provides, and competition for throughput at ONEOK Partners’ gathering systems, pipelines, processing plants, fractionators and storage facilities.

ONEOK Partners cannot predict when it will be subject to changes in legislation or regulation, nor can it predict the impact of these changes on its financial position, results of operations or cash flows.  There are no assurances that ONEOK Partners’ business will be positioned to effectively compete in the future.

26



ONEOK Partners does not hedge fully against commodity price changes, time differentials or locational differentials. This could result in decreased revenues and increased costs, thereby resulting in lower margins and adversely affecting its results of operations.

Certain of ONEOK Partners’ nonregulated and regulated businesses are exposed to market risk and the impact of market price fluctuations of natural gas, NGLs and crude oil.  Market risk refers to the risk of loss of cash flows and future earnings arising from adverse changes in commodity prices.  ONEOK Partners’ primary exposures arise from:
the value of the NGLs and natural gas it receives in exchange for the natural gas gathering and processing services it provides;
the differentials between NGL and natural gas prices associated with its keep-whole contracts and the differentials between the individual NGL products with respect to ONEOK Partners’ natural gas liquids transportation and fractionation agreements;
the price differentials between the individual NGL products;
the NGL price differentials at different locations;
the seasonal price differentials of natural gas and NGLs related to storage operations;
the fuel costs and the value of the retained fuel in-kind in ONEOK Partners’ natural gas pipelines and storage operations; and
the differential between ethane and natural gas prices.

ONEOK Partners also is exposed to the risk of changing prices or the cost of transportation resulting from purchasing natural gas or NGLs at one location and selling it at another (referred to as basis risk).  To minimize the risk from market price fluctuations of natural gas, NGLs and crude oil, ONEOK Partners uses physical forward transactions and commodity financial derivative instruments such as futures contracts, swaps and options to manage market risk of existing or anticipated purchases and sales of natural gas, NGLs and crude oil.  ONEOK Partners adheres to policies and procedures that monitor its exposure to market risk from open positions.  However, it do not hedge fully against commodity price changes, and therefore, it retains some exposure to market risk.  Accordingly, any adverse changes to commodity prices could result in decreased revenue and/or increased costs.

ONEOK Partners’ use of financial instruments and physical forward transactions to hedge market risk may result in reduced income.

ONEOK Partners utilizes financial instruments and physical forward transactions to mitigate its exposure to interest rate and commodity price fluctuations.  Hedging instruments that are used to reduce ONEOK Partners’ exposure to interest-rate fluctuations could expose it to risk of financial loss where it has contracted for variable-rate swap instruments to hedge fixed-rate instruments and the variable rate exceeds the fixed rate.  In addition, these hedging arrangements may limit the benefit ONEOK Partners would otherwise receive if it had contracted for fixed-rate swap agreements to hedge variable-rate instruments and the variable rate falls below the fixed rate.  Hedging arrangements that are used to reduce ONEOK Partners’ exposure to commodity price fluctuations limit the benefit it would otherwise receive if market prices for natural gas, crude oil and NGLs exceed the stated price in the hedge instrument for these commodities.

The adoption and implementation of new statutory and regulatory requirements for derivative transactions could have an adverse impact on ONEOK Partners’ ability to hedge risks associated with its business and increase the working capital requirements to conduct these activities.

In July 2010, the Dodd-Frank Act was enacted, which provides new statutory and regulatory requirements for certain swap transactions.  Certain financial transactions will be required to be cleared on exchanges, and cash collateral will be required for these transactions.  However, the Dodd-Frank Act provides for a potential exemption from these clearing and cash collateral requirements for commercial end-users and includes a number of defined terms that will be used in determining how this exemption applies to particular derivative transactions and to the parties to those transactions. Additionally, the Dodd-Frank Act calls for various regulatory agencies, including the SEC and the CFTC, to establish regulations for implementation of many of the provisions of the act.

The Dodd-Frank Act represents a far-reaching overhaul of the framework for regulation of United States financial markets. The CFTC has issued final regulations for most of the provisions of the Dodd-Frank Act, and ONEOK Partners has implemented measures to comply with the regulations that are applicable to its businesses. ONEOK Partners expects to continue to participate in financial markets for hedging certain risks inherent in its business, including commodity-price and

27


interest-rate risks. ONEOK Partners continues to monitor proposed regulations and the impact the regulations may have on its business and risk-management strategies in the future.

ONEOK Partners’ inability to develop and execute growth projects and acquire new assets could result in reduced cash distributions to its unitholders and to ONEOK.

ONEOK Partners’ primary business objectives are to generate cash flow sufficient to pay quarterly cash distributions to unitholders and to increase these distributions over time.  ONEOK Partners’ ability to maintain and grow its distributions to unitholders, including ONEOK, depends on the growth of its existing businesses and strategic acquisitions.  Accordingly, if ONEOK Partners is unable to implement business development opportunities and finance such activities on economically acceptable terms, its future growth will be limited, which could impact adversely its and our results of operations and cash flows.
 
Growing ONEOK Partners’ business by constructing new pipelines and plants or making modifications to its existing facilities subjects ONEOK Partners to construction and supply risks should adequate natural gas or NGL supply be unavailable upon completion of the facilities.

One of the ways ONEOK Partners intends to grow its business is through the construction of new pipelines and new gathering, processing, storage and fractionation facilities and through modifications to ONEOK Partners’ existing pipelines and existing gathering, processing, storage and fractionation facilities.  The construction and modification of pipelines and gathering, processing, storage and fractionation facilities may require significant capital expenditures, which may exceed ONEOK Partners’ estimates, and involve numerous regulatory, environmental, political, legal and weather-related uncertainties. Construction projects in ONEOK Partners’ industry may increase demand for labor, materials and rights of way, which may, in turn, impact ONEOK Partners’ costs and schedule.  If ONEOK Partners undertakes these projects, it may not be able to complete them on schedule or at the budgeted cost.  Additionally, ONEOK Partners’ revenues may not increase immediately upon the expenditure of funds on a particular project.  For instance, if ONEOK Partners builds a new pipeline, the construction will occur over an extended period of time, and ONEOK Partners will not receive any material increases in revenues until after completion of the project.  ONEOK Partners may have only limited natural gas or NGL supply committed to these facilities prior to their construction.  Additionally, ONEOK Partners may construct facilities to capture anticipated future growth in production in a region in which anticipated production growth does not materialize.  ONEOK Partners may also rely on estimates of proved reserves in its decision to construct new pipelines and facilities, which may prove to be inaccurate because there are numerous uncertainties inherent in estimating quantities of proved reserves.  As a result, new facilities may not be able to attract enough natural gas or NGLs to achieve ONEOK Partners’ expected investment return, which could affect materially and adversely ONEOK Partners’ results of operations, financial condition and cash flows.

If the level of drilling and production in the Mid-Continent, Rocky Mountain, Texas and Gulf Coast regions declines substantially near its assets, ONEOK Partners’ volumes and revenue could decline.

ONEOK Partners’ ability to maintain or expand its businesses depends largely on the level of drilling and production by third parties in the Mid-Continent, Rocky Mountain, Texas and Gulf Coast regions.  Drilling and production are impacted by factors beyond ONEOK Partners’ control, including:
demand and prices for natural gas, NGLs and crude oil;
producers’ finding and developing costs of reserves;
producers’ desire and ability to obtain necessary permits in a timely and economic manner;
natural gas field characteristics and production performance;
surface access and infrastructure issues; and
capacity constraints on natural gas, crude oil and natural gas liquids infrastructure from the producing areas and ONEOK Partners’ facilities.

If production from the Western Canada Sedimentary Basin remains flat or declines, and demand for natural gas from the Western Canada Sedimentary Basin is greater in market areas other than the Midwestern United States, demand for ONEOK Partners’ interstate gas transportation services could decrease significantly.

ONEOK Partners depends on natural gas supply from the Western Canada Sedimentary Basin for some of ONEOK Partners’ interstate pipelines, primarily Viking Gas Transmission and ONEOK Partners’ investment in Northern Border Pipeline, that transport Canadian natural gas from the Western Canada Sedimentary Basin to the Midwestern United States market area.  If demand for natural gas increases in Canada or other markets not served by ONEOK Partners’ interstate pipelines and/or

28


production remains flat or declines, demand for transportation service on ONEOK Partners’ interstate natural gas pipelines could decrease significantly, which could impact adversely ONEOK Partners’ results of operations and cash flows.

ONEOK Partners’ operations are subject to operational hazards and unforeseen interruptions that could affect materially and adversely ONEOK Partners’ business and for which neither we nor ONEOK Partners may be insured adequately.

ONEOK Partners’ 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 ONEOK Partners’ pipeline facilities (for example, this may occur if a third party were to perform excavation or construction work near ONEOK Partners’ facilities) and catastrophic events such as tornados, hurricanes, earthquakes, floods or other similar events beyond ONEOK Partners’ control.  It is also possible that ONEOK Partners’ 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 ONEOK Partners’ pipelines or other facilities caused by such an event could reduce revenues generated by ONEOK Partners and increase expenses, thereby impairing our or ONEOK Partners’ ability to meet our respective obligations.  Insurance proceeds may not be adequate to cover all liabilities or expenses incurred or revenues lost, and neither we nor ONEOK Partners are fully insured against all risks inherent in our respective businesses.
 
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, neither we nor ONEOK Partners may be able to renew existing insurance policies or purchase other desirable insurance on commercially reasonable terms, if at all.  If either we or ONEOK Partners were to incur a significant liability for which either we or ONEOK Partners was not insured fully, it could have a material adverse effect on our or ONEOK Partners’ financial position 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.

ONEOK Partners does not own all of the land on which its pipelines and facilities are located, and it leases certain facilities and equipment, which could disrupt its operations.

ONEOK Partners does not own all of the land on which certain of its pipelines and facilities are located and are, therefore, subject to the risk of increased costs to maintain necessary land use.  ONEOK Partners obtains the rights to construct and operate certain of its pipelines and related facilities on land owned by third parties and governmental agencies for a specific period of time.  Loss of these rights, through its inability to renew right-of-way contracts on acceptable terms or increased costs to renew such rights, could have a material adverse effect on ONEOK Partners’ financial condition, results of operations and cash flows.

Pipeline-integrity programs and repairs may impose significant costs and liabilities.

Pursuant to a DOT rule, pipeline operators are required to develop pipeline integrity-management programs for intrastate and interstate natural gas and natural gas liquids pipelines that could affect high-consequence areas in the event of a release of product.  As defined by applicable regulations, high-consequence areas include areas near the route of a pipeline with high-population densities, facilities occupied by persons of limited mobility or indoor or outdoor areas where at least 20 people gather periodically.  The rule requires operators to identify pipeline segments that could impact a high-consequence area; improve data collection, integration and characterization of threats applicable to each segment; implement preventive and mitigating actions; perform ongoing assessments of pipeline integrity; and repair and remediate as necessary.  These testing programs could cause us and ONEOK Partners to incur significant capital and operating expenditures to make repairs or remediate, as well as initiate preventive or mitigating actions that are determined to be necessary.

ONEOK Partners is subject to comprehensive energy regulation by governmental agencies, and the recovery of its costs are dependent on regulatory action.

Federal, state and local agencies have jurisdiction over many of ONEOK Partners’ activities, including regulation by the FERC of its storage and interstate pipeline assets.  The profitability of ONEOK Partners’ regulated operations is dependent on its ability to pass through costs related to providing energy and other commodities to its customers by filing periodic rate

29


cases.  The regulatory environment applicable to ONEOK Partners’ regulated businesses could impair its ability to recover costs historically absorbed by its customers.

ONEOK Partners is unable to predict the impact that the future regulatory activities of these agencies will have on its operating results.  Changes in regulations or the imposition of additional regulations could have an adverse impact on ONEOK Partners’ business, financial condition and results of operations.

ONEOK Partners’ 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, ONEOK Partners’ interstate transportation rates, which are regulated by the FERC, must be just and reasonable and not unduly discriminatory.

Shippers may protest ONEOK Partners’ pipeline tariff filings, and the FERC and/or state regulatory agencies 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 ONEOK Partners’ 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 ONEOK Partners’ pipeline systems will be able to recover all of their costs through existing or future rates.

ONEOK Partners’ regulated pipeline companies have recorded certain assets that may not be recoverable from its customers.

Accounting policies for FERC-regulated companies permit certain assets that result from the regulated ratemaking process to be recorded on ONEOK Partners’ balance sheet that could not be recorded under GAAP for nonregulated entities.  ONEOK Partners considers factors such as regulatory changes and the impact of competition to determine the probability of future recovery of these assets.  If ONEOK Partners determines future recovery is no longer probable, ONEOK Partners would be required to write off the regulatory assets at that time.

Compliance with environmental regulations that ONEOK Partners is subject to may be difficult and costly.

ONEOK Partners is subject to multiple environmental laws and regulations affecting many aspects of present and future operations, including air emissions, water quality, wastewater discharges, solid and hazardous wastes, and hazardous material and substance management.  These laws and regulations require ONEOK Partners to obtain and comply with a wide variety of environmental registrations, licenses, permits, inspections and other approvals.  Failure to comply with these laws, regulations, permits and licenses may expose ONEOK Partners to fines, penalties and/or interruptions in its operations that could be material to its results of operations. If a leak or spill of hazardous substance occurs from ONEOK Partners’ pipelines or gathering lines or facilities in the process of transporting natural gas or NGLs or at any facility that ONEOK Partners owns, operates or otherwise uses, ONEOK Partners could be held jointly and severally liable for all resulting liabilities, including investigation and clean-up costs, which could affect materially its results of operations and cash flows.  In addition, emission controls required under the federal Clean Air Act and other similar federal and state laws could require unexpected capital expenditures at ONEOK Partners’ facilities.  In addition, the EPA issued a rule on air-quality standards, “National Emission Standards for Hazardous Air Pollutants for Reciprocating Internal Combustion Engines,” also known as RICE NESHAP, with a compliance date in 2013.  The rule will require capital expenditures over the next three years for the purchase and installation of new emissions-control equipment.  ONEOK Partners does not expect these expenditures to have a material impact on its results of operations, financial position or cash flows.  ONEOK Partners cannot assure that existing environmental regulations will not be revised or that new regulations will not be adopted or become applicable to it.  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 ONEOK Partners’ business, financial condition and results of operations.  For further discussion on this topic, see Note R of the Notes to Consolidated Financial Statements in this Annual Report.


30


ONEOK Partners’ operations are subject to federal and state laws and regulations relating to the protection of the environment, which may expose it to significant costs and liabilities.

The risk of incurring substantial environmental costs and liabilities is inherent in ONEOK Partners’ business.  ONEOK Partners’ 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 waste water from ONEOK Partners’ facilities to state and federal waters;
the federal 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 ONEOK Partners or locations to which ONEOK Partners has sent waste for disposal;
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 ONEOK Partners’ facilities; and
an EPA-issued rule on air-quality standards, known as RICE NESHAP.

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 ONEOK Partners’ business due to its handling of the products it gathers, transports, processes and stores, air emissions related to its operations, past industry operations and waste disposal practices, some of which may be material.  Private parties, including the owners of properties through which ONEOK Partners’ 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 ONEOK Partners’ operations.  Some sites ONEOK Partners operates 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 ONEOK Partners’ sites.  In addition, increasingly strict laws, regulations and enforcement policies could increase significantly ONEOK Partners’ 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 “Environmental and Safety Matters” and in Note R of the Notes to Consolidated Financial Statements in this Annual Report.
 
ONEOK Partners’ insurance may not cover all environmental risks and costs or may not provide sufficient coverage in the event an environmental claim is made against ONEOK Partners.  ONEOK Partners’ 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 environmental regulations might also materially and adversely affect ONEOK Partners’ products and activities, and federal and state agencies could impose additional safety requirements, all of which could affect materially ONEOK Partners’ profitability.

ONEOK Partners may face significant costs to comply with the regulation of greenhouse gas emissions.

Greenhouse gas emissions originate primarily from combustion engine exhaust, heater exhaust and fugitive methane gas emissions.  Various federal and state legislative proposals have been introduced to regulate the emission of greenhouse gases, 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 greenhouse gases.
 
ONEOK Partners believes it is possible that future governmental legislation and/or regulation may require it either to limit greenhouse gas emissions from its operations or to purchase allowances for such emissions that are actually attributable to its NGL customers.  However, it 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 greenhouse gases that can be emitted (so called “caps”) together with systems of emissions allowances.  This system could require ONEOK Partners 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.
 

31


In addition to activities on the federal level, state and regional initiatives could also lead to the regulation of greenhouse gas emissions sooner and/or independent of federal regulation.  These regulations could be more stringent than any federal regulation or legislation that is adopted.
 
Future legislation and/or regulation designed to reduce greenhouse gas emissions could make some of its activities uneconomic to maintain or operate.  Further, ONEOK Partners may not be able to pass on the higher costs to its customers or recover all costs related to complying with greenhouse gas regulatory requirements.  Its future results of operations, cash flows or financial condition could be adversely affected if such costs are not recovered through regulated rates or otherwise passed on to its customers.
 
ONEOK Partners continues to monitor legislative and regulatory developments in this area.  Although the regulation of greenhouse gas emissions may have a material impact on its operations and rates, it is unable to quantify the potential costs of the impacts at this time.

ONEOK Partners may not be able to pass on the higher costs to its customers or recover all costs related to complying with greenhouse gas emission regulatory requirements, which could cause material adverse effects on its and our business, financial condition, results of operations and cash flows.

ONEOK Partners is subject to physical and financial risks associated with climate change.

There is a growing belief that emissions of greenhouse gases may be linked to global climate change.  Climate change creates physical and financial risk.  ONEOK Partners’ 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 ONEOK Partners to invest in more pipelines and other infrastructure to serve increased demand.  A decrease in energy use due to weather changes may affect its 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 ONEOK Partners’ operating territory could also have an impact on its revenues.  Severe weather impacts its 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 its cost of providing service.  ONEOK Partners may not be able to pass on the higher costs to its customers or recover all the costs related to mitigating these physical risks.  To the extent financial markets view climate change and emissions of greenhouse gases as a financial risk, this could affect negatively its ability to access capital markets or cause ONEOK Partners to receive less favorable terms and conditions in future financings.  Its business could be affected by the potential for lawsuits against greenhouse gas emitters, based on links drawn between greenhouse gas emissions and climate change.

ONEOK Partners’ business is subject to regulatory oversight and potential penalties.

The natural gas industry historically has been subject to heavy state and federal regulation that extends to many aspects of ONEOK Partners’ businesses and operations, including:
rates, operating terms and conditions of service;
the types of services ONEOK Partners may offer it customers;
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 ONEOK Partners’ ability to compete for business or to recover costs and may increase the cost and burden of operations. ONEOK Partners cannot guarantee that state or federal regulators will authorize any projects or acquisitions that it may propose in the future.  Moreover, ONEOK Partners cannot guarantee that, if granted, any such authorizations will be made in a timely manner or will be free from potentially burdensome conditions.


32


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, ONEOK Partners cannot give any assurance regarding future state or federal regulations under which it will operate or the effect such regulations could have on its business, financial condition and results of operations.

Demand for natural gas and for certain of ONEOK Partners’ products and services is highly weather sensitive and seasonal.

The demand for natural gas in our ONEOK Partners segment and for certain of ONEOK Partners’ 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.  Deviations in weather from normal levels and the seasonal nature of certain of ONEOK Partners’ businesses can create variations in earnings and short-term cash requirements.

Energy efficiency and technological advances may affect the demand for natural gas and affect adversely ONEOK Partners’ operating results.

The national trend toward increased energy conservation and technological advances, including installation of improved insulation and the development of more efficient furnaces and other heating devices, may decrease the demand for natural gas by residential customers.  More strict energy-conservation measures in the future or technological advances in heating, conservation, energy generation or other devices could affect adversely ONEOK Partners’ results of operations and cash flows.

In the competition for customers, ONEOK Partners may have significant levels of uncontracted or discounted capacity on its natural gas and natural gas liquids pipelines, processing, fractionation and storage assets.

ONEOK Partners’ 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 supplies delivered to the markets it serves.  As a result of competition, at any given time ONEOK Partners may have significant levels of uncontracted or discounted capacity on its pipelines, processing, fractionation and in its storage assets, which could have a material adverse impact on ONEOK Partners’ results of operations and cash flows.
 
ONEOK Partners is exposed to the credit risk of its customers or counterparties, and its credit risk management may not be adequate to protect against such risk.

ONEOK Partners is subject to the risk of loss resulting from nonpayment and/or nonperformance by ONEOK Partners’ customers or counterparties.  ONEOK Partners’ customers or counterparties may experience rapid deterioration of their financial condition as a result of changing market conditions or financial difficulties that could impact their creditworthiness or ability to pay ONEOK Partners for its services.  ONEOK Partners assesses the creditworthiness of its customers or counterparties and obtains collateral as it deems appropriate.  If ONEOK Partners fails to assess adequately the creditworthiness of existing or future customers or counterparties, unanticipated deterioration in their creditworthiness and any resulting nonpayment and/or nonperformance could adversely impact ONEOK Partners’ results of operations.  In addition, if any of ONEOK Partners’ customers or counterparties files for bankruptcy protection, this could have a material negative impact on ONEOK Partners’ results of operations and cash flows.

Any reduction in ONEOK Partners’ credit ratings could affect materially and adversely its business, financial condition, liquidity and results of operations.

ONEOK Partners’ senior unsecured long-term debt has been assigned an investment-grade rating by Moody’s of “Baa2” (Stable) and by S&P of “BBB” (Stable) as of February 3, 2014; however, we cannot provide assurance that any of its current ratings will remain in effect for any given period of time or that a rating will not be lowered or withdrawn entirely by a rating agency if, in its judgment, circumstances in the future so warrant.  Specifically, if Moody’s or S&P were to downgrade ONEOK Partners’ long-term debt rating, particularly below investment grade, its borrowing costs would increase, which would affect adversely its financial results, and its potential pool of investors and funding sources could decrease.  Ratings from credit agencies are not recommendations to buy, sell or hold ONEOK Partners’ debt securities.  Each rating should be evaluated independently of any other rating.
 

33


An event of default may require ONEOK Partners to offer to repurchase certain of its senior notes or may impair its ability to access capital.

The indentures governing ONEOK Partners’ senior notes include an event of default upon the acceleration of other indebtedness of $100 million or more.  Such events of default would entitle the trustee or the holders of 25 percent in aggregate principal amount of ONEOK Partners’ outstanding senior notes to declare those senior notes immediately due and payable in full.  ONEOK Partners may not have sufficient cash on hand to repurchase and repay any accelerated senior notes, which may cause ONEOK Partners to borrow money under its credit facilities or seek alternative financing sources to finance the repurchases and repayment.  ONEOK Partners could also face difficulties accessing capital or its borrowing costs could increase, impacting its ability to obtain financing for acquisitions or capital expenditures, to refinance indebtedness and to fulfill its debt obligations.

ONEOK Partners’ indebtedness could impair its financial condition and ability to fulfill its obligations.

As of December 31, 2013, ONEOK Partners had total indebtedness of approximately $6.1 billion.  Its indebtedness could have significant consequences.  For example, it could:
make it more difficult to satisfy its obligations with respect to its senior notes and other indebtedness, which could in turn result in an event of default on such other indebtedness or its senior notes;
impair its ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions or general business purposes;
diminish its ability to withstand a downturn in its business or the economy;
require it to dedicate a substantial portion of its cash flow from operations to debt-service payments, thereby reducing the availability of cash for working capital, capital expenditures, acquisitions, distributions to partners and general partnership purposes;
limit its flexibility in planning for, or reacting to, changes in its business and the industry in which it operates; and
place it at a competitive disadvantage compared with its competitors that have proportionately less debt.

ONEOK Partners is not prohibited under the indentures governing its senior notes from incurring additional indebtedness, but its debt agreements do subject it to certain operational limitations summarized in the next paragraph. ONEOK Partners’ incurrence of significant additional indebtedness would exacerbate the negative consequences mentioned above and could affect adversely its ability to repay its senior notes and other indebtedness.

ONEOK Partners’ debt agreements contain provisions that restrict its ability to finance future operations or capital needs or to expand or pursue its business activities.  For example, certain of these agreements contain provisions that, among other things, limit its ability to make loans or investments, make material changes to the nature of its business, merge, consolidate or engage in asset sales, grant liens or make negative pledges.  Certain agreements also require it to maintain certain financial ratios, which limit the amount of additional indebtedness it can incur.  For example, the ONEOK Partners Credit Agreement contains a legal covenant requiring it to maintain a ratio of indebtedness to adjusted EBITDA (EBITDA, as defined in the ONEOK Partners Credit Agreement, adjusted for all noncash charges and increased for projected EBITDA from certain lender-approved capital expansion projects) of no more than 5.0 to 1. If ONEOK Partners consummates one or more acquisitions in which the aggregate purchase price is $25 million or more, the allowable ratio of indebtedness to adjusted EBITDA will increase to 5.5 to 1 for the quarter of the acquisition and the two following quarters. As a result of ONEOK Partners completing the Sage Creek acquisition on September 30, 2013, and acquiring the remaining 30 percent interest in its Maysville facility in the fourth quarter 2013, the allowable ratio of indebtedness to adjusted EBITDA increased to 5.5 to1 for the current quarter and will remain at that level through the second quarter 2014.

These restrictions could result in higher costs of borrowing and impair its ability to generate additional cash.   Future financing agreements ONEOK Partners may enter into may contain similar or more restrictive covenants.

If ONEOK Partners is unable to meet its debt-service obligations, it could be forced to restructure or refinance its indebtedness, seek additional equity capital or sell assets.  It may be unable to obtain financing, raise equity or sell assets on satisfactory terms, or at all.

Borrowings under the ONEOK Partners Credit Agreement and its senior notes are nonrecourse to ONEOK, and ONEOK does not guarantee the debt, commercial paper or other similar commitments of ONEOK Partners.


34


ONEOK Partners has adopted certain valuation methodologies that may result in a shift of income, gain, loss and deduction between the general partner and the unitholders.  The IRS may challenge this treatment, which could adversely affect the value of its limited partner units.

When ONEOK Partners issues additional units or engages in certain other transactions, ONEOK Partners determines the fair market value of its assets and allocates any unrealized gain or loss attributable to its assets to the capital accounts of its unitholders and its general partner.  ONEOK Partners’ methodology may be viewed as understating the value of its assets.  In that case, there may be a shift of income, gain, loss and deduction between certain unitholders and the general partner, which may be unfavorable to such unitholders.  Moreover, under ONEOK Partners’ current valuation methods, subsequent purchasers of common units may have a greater portion of their Internal Revenue Code Section 743(b) adjustment allocated to ONEOK Partners’ tangible assets and a lesser portion allocated to ONEOK Partners’ intangible assets.  The IRS may challenge ONEOK Partners’ valuation methods or ONEOK Partners’ allocation of the Section 743(b) adjustment attributable to ONEOK Partners’ tangible and intangible assets, and allocations of income, gain, loss and deduction between the general partner and certain of ONEOK Partners’ unitholders.
 
A successful IRS challenge to these methods or allocations could affect adversely the amount of taxable income or loss being allocated to ONEOK Partners’ unitholders.  It also could affect the amount of gain from ONEOK Partners unitholders’ sale of common units and could have a negative impact on the value of the common units or result in audit adjustments to ONEOK Partners unitholders’ tax returns without the benefit of additional deductions.

ONEOK Partners’ treatment of a purchaser of common units as having the same tax benefits as the seller could be challenged, resulting in a reduction in value of the common units.

Because ONEOK Partners cannot match transferors and transferees of common units, ONEOK Partners is required to maintain the uniformity of the economic and tax characteristics of these units in the hands of the purchasers and sellers of these units. ONEOK Partners does so by adopting certain depreciation conventions that do not conform to all aspects of existing United States Treasury regulations.  A successful IRS challenge to these conventions could affect adversely the tax benefits to a unitholder of ownership of the common units and could have a negative impact on their value or result in audit adjustments to ONEOK Partners unitholders’ tax returns.

Increased regulation of exploration and production activities, including hydraulic fracturing, could result in reductions or delays in drilling and completing new oil and natural gas wells, which could impact adversely ONEOK Partners’ revenues by decreasing the volumes of unprocessed natural gas and NGLs transported on its or its joint ventures’ natural gas and natural gas liquids pipelines.

The natural gas industry is relying increasingly on natural gas supplies from unconventional 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 the geologic formation to stimulate natural gas production. Recently, there have been initiatives at the federal and state levels to regulate or otherwise restrict the use of hydraulic fracturing, and several states have adopted regulations that impose more stringent permitting, disclosure and well-completion requirements on hydraulic fracturing operations.  Legislation or regulations placing restrictions on hydraulic fracturing activities could impose operational delays, increased operating costs and additional regulatory burdens on exploration and production operators, which could reduce their production of unprocessed natural gas and, in turn, adversely affect ONEOK Partners’ revenues and results of operations by decreasing the volumes of unprocessed natural gas and NGLs gathered, treated, processed, fractionated and transported on ONEOK Partners’ or its joint ventures’ natural gas and natural gas liquids pipelines, several of which gather unprocessed natural gas and NGLs from areas where the use of hydraulic fracturing is prevalent.

Continued development of new supply sources could impact demand.

The discovery of unconventional natural gas production areas closer to certain market areas that ONEOK Partners serves may compete with natural gas originating in production areas connected to ONEOK Partners’ systems.  For example, the Marcellus Shale in Pennsylvania, New York, West Virginia and Ohio may cause natural gas in supply areas connected to ONEOK Partners’ systems to be diverted to markets other than its traditional market areas and may affect capacity utilization adversely on ONEOK Partners’ pipeline systems and ONEOK Partners’ ability to renew or replace existing contracts at rates sufficient to maintain current revenues and cash flows.  In addition, supply volumes from these nonconventional natural gas production areas may compete with and displace volumes from the Mid-Continent, Rocky Mountains and Canadian supply sources in certain of ONEOK Partners’ markets.  The displacement of natural gas originating in supply areas connected to ONEOK Partners’ pipeline systems by these new supply sources that are closer to the end-use markets could result in lower

35


transportation revenues, which could have a material adverse impact on ONEOK Partners’ business, financial condition, results of operations and cash flows.

A court may use fraudulent conveyance considerations to avoid or subordinate the Intermediate Partnership’s guarantee of certain of ONEOK Partners’ senior notes.

Various applicable fraudulent conveyance laws have been enacted for the protection of creditors.  A court may use fraudulent conveyance laws to subordinate or avoid the guarantee of certain of ONEOK Partners’ senior notes issued the Intermediate Partnership.  It is also possible that under certain circumstances, a court could hold that the direct obligations of the Intermediate Partnership could be superior to the obligations under that guarantee.
 
A court could avoid or subordinate the Intermediate Partnership’s guarantee of certain of ONEOK Partners’ senior notes in favor of the Intermediate Partnership’s other debts or liabilities to the extent that the court determined either of the following were true at the time the Intermediate Partnership issued the guarantee:
the Intermediate Partnership incurred the guarantee with the intent to hinder, delay or defraud any of its present or future creditors or the Intermediate Partnership contemplated insolvency with a design to favor one or more creditors to the total or partial exclusion of others; or
the Intermediate Partnership did not receive fair consideration or reasonable equivalent value for issuing the guarantee and, at the time it issued the guarantee, the Intermediate Partnership:
–     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 Intermediate Partnership’s guarantee of certain of ONEOK Partners’ senior notes on fraudulent conveyance grounds may focus on the benefits, if any, realized by the Intermediate Partnership as a result of ONEOK Partners’ issuance of such senior notes.  To the extent the Intermediate Partnership’s guarantee of certain of ONEOK Partners’ senior notes is avoided as a result of fraudulent conveyance or held unenforceable for any other reason, the holders of such senior notes would cease to have any claim in respect of the guarantee.

ONEOK Partners may be unable to cause its joint ventures to take or not to take certain actions unless some or all of its joint-venture participants agree.

ONEOK Partners participates 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 which 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, ONEOK Partners may be unable to cause any of its joint ventures to take or not to take certain actions, even though those actions may be in the best interest of ONEOK Partners 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 ONEOK Partners being required to partner with different or additional parties.


36


ONEOK Partners’ operating cash flow is derived partially from cash distributions it receives from its unconsolidated affiliates.

ONEOK Partners’ operating cash flow is derived partially from cash distributions it receives from its unconsolidated affiliates, as discussed in Note P of the Notes to Consolidated Financial Statements.  The amount of cash that ONEOK Partners’ unconsolidated affiliates can distribute principally depends upon the amount of cash flow these affiliates generate from their respective operations, which may fluctuate from quarter to quarter.  ONEOK Partners does not have any direct control over the cash distribution policies of its unconsolidated affiliates.  This lack of control may contribute to ONEOK Partners’ not having sufficient available cash each quarter to continue paying distributions at its current levels.
 
Additionally, the amount of cash that ONEOK Partners has available for cash distribution depends primarily upon its cash flow, including cash flow from financial reserves and 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, ONEOK Partners may be able to make cash distributions during periods when it records losses and may not be able to make cash distributions during periods when it records net income.

ITEM 1B.    UNRESOLVED STAFF COMMENTS

Not applicable.

ITEM 2.    PROPERTIES

DESCRIPTION OF PROPERTIES

ONEOK Partners

Property - Our ONEOK Partners segment owns the following assets at December 31, 2013:
eight natural gas processing plants with approximately 585 MMcf/d of natural gas processing capacity in the Mid-Continent region, and eight natural gas processing plants, with approximately 465 MMcf/d of processing capacity, in the Rocky Mountain region;
approximately 30 MBbl/d of natural gas liquids fractionation capacity at various natural gas processing plants in the Mid-Continent and Rocky Mountain regions;
approximately 11,300 miles and 7,000 miles of natural gas gathering pipelines in the Mid-Continent and Rocky Mountain regions, respectively;
approximately 2,700 miles of non-FERC-regulated natural gas liquids gathering pipelines with peak gathering capacity of approximately 772 MBbl/d;
approximately 170 miles of non-FERC regulated natural gas liquids distribution pipelines with approximately 66 MBbl/d of peak transportation capacity;
approximately 1,510 miles of FERC-regulated natural gas liquids gathering pipelines with peak capacity of approximately 270 MBbl/d;
approximately 3,500 miles of FERC-regulated natural gas liquids and refined petroleum products distribution pipelines with approximately 708 MBbl/d of peak transportation capacity;
one natural gas liquids fractionator, located in Oklahoma, with operating capacity of approximately 210 MBbl/d; two natural gas liquids fractionators, located in Kansas, with combined operating capacity of 260 MBbl/d; and one natural gas liquids fractionator, located in Texas, with operating capacity of 75 MBbl/d;
80 percent ownership interest in one natural gas liquids fractionator in Texas with ONEOK Partners’ proportional share of operating capacity of approximately 128 MBbl/d;
interest in one natural gas liquids fractionator in Kansas with ONEOK Partners’ proportional share of operating capacity of approximately 11 MBbl/d;
one isomerization unit in Kansas with operating capacity of 9 MBbl/d;
six natural gas liquids storage facilities in Oklahoma, Kansas and Texas with operating storage capacity of approximately 23.2 MMBbl;
eight natural gas liquids product terminals in Missouri, Nebraska, Iowa and Illinois;
above- and below-ground storage facilities associated with its FERC-regulated natural gas liquids pipeline operations in Iowa, Illinois, Nebraska and Kansas with combined operating capacity of approximately 978 MBbl;
access to 60 MBbl/d natural gas liquids fractionation capacity in Texas through a fractionation services agreement; and
access to approximately 2.5 MMBbl of leased NGL storage capacity at facilities in Kansas and Texas;

37


approximately 1,500 miles of FERC-regulated interstate natural gas pipelines with approximately 3.2 Bcf/d of peak transportation capacity;
approximately 5,100 miles of state-regulated intrastate transmission pipelines with approximately 3.0 Bcf/d of peak transportation capacity; and
approximately 53.7 Bcf of total working natural gas storage capacity.

ONEOK Partners’ storage includes five underground natural gas storage facilities in Oklahoma, two underground natural gas storage facilities in Kansas and two underground natural gas storage facilities in Texas.

As discussed further in “Growth Projects” in ONEOK Partners segment’s discussion in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, ONEOK Partners expects to complete the following assets in March 2014:
one natural gas processing plant, the Canadian Valley Plant in Oklahoma, with approximately 200 MMcf/d of processing capacity, in the Mid-Continent region;
approximately 540 miles of FERC-regulated natural gas liquids distribution pipeline, the Sterling III pipeline, from Medford, Oklahoma, to Mont Belvieu, Texas, with peak capacity of 193 MBbl/d; and
one ethane/propane splitter with the capacity to produce 32 MBbl/d of purity ethane and 8 MBbl/d of propane located in Texas.

ONEOK Partners also is constructing, or plans to construct, the following assets:
three natural gas processing plants with approximately 400 MMcf/d of combined processing capacity in the Rocky Mountain region;
approximately 95 miles of FERC-regulated distribution pipelines from Hutchinson, Kansas, to Medford, Oklahoma;
one natural gas liquids fractionator, MB-3 located in Texas, with operating capacity of approximately 75 MBbl/d; and
upgrade and construct natural gas gathering and processing infrastructure related to the Sage Creek expansion project.

Utilization - The utilization rates for ONEOK Partners’ various assets for 2013 and 2012, respectively were as follows:
natural gas processing plants were approximately 71 percent and 69 percent utilized;
natural gas pipelines were approximately 90 percent and 89 percent subscribed;
FERC-regulated natural gas liquids gathering pipelines were approximately 71 percent and 99 percent utilized;
FERC-regulated natural gas liquids distribution pipelines were approximately 58 percent and 65 percent utilized;
non-FERC-regulated natural gas liquids pipelines were approximately 69 percent and 68 percent subscribed;
natural gas liquids fractionators were approximately 78 percent and 89 percent utilized;
average contracted natural gas liquids storage volumes were approximately 72 percent and 60 percent of storage capacity; and
natural gas storage facilities were 92 percent and fully subscribed.

ONEOK Partners calculates utilization on its assets using a weighted-average approach, adjusting for the dates that assets were placed in service.  The utilization rate of ONEOK Partners’ NGL fractionation facilities reflects leased capacity and the approximate proportional capacity associated with ONEOK Partners’ ownership interests.

Natural Gas Distribution

Property - At December 31, 2013, we owned approximately 19,000 miles of pipeline and other natural gas distribution facilities in Oklahoma; approximately 13,000 miles of pipeline and other natural gas distribution facilities in Kansas; and approximately 10,000 miles of pipeline and other natural gas distribution facilities in Texas.  In addition, we had 57.3 Bcf of natural gas storage capacity under lease with maximum withdrawal capacity of approximately 1.5 Bcf/d. Following the separation of our natural gas distribution business in January 2014, all of these properties are owned or leased by ONE Gas.

Energy Services

Property - Our total natural gas storage capacity under lease is 23.5 Bcf.  Of the 23.5 Bcf, 20.5 Bcf will expire by March 31, 2014. In the first quarter, we assigned the remaining 3.0 Bcf to a third party, effective April 1, 2014. At December 31, 2013, our natural gas transportation capacity was 0.07 Bcf/d, which will expire on March 31, 2014.  


38


Other

Property - We own the 17-story ONEOK Plaza office building, with approximately 505,000 square feet of net rentable space, and an associated parking garage.

ITEM 3.    LEGAL PROCEEDINGS

Gas Index Pricing Litigation: We, OESC and one other affiliate are defending, either individually or together, against the following lawsuits that claim damages resulting from the alleged market manipulation or false reporting of prices to gas index publications by us and others: Sinclair Oil Corporation v. ONEOK Energy Services Corporation, L.P., et al. (filed in the United States District Court for the District of Wyoming in September 2005, transferred to MDL-1566 in the United States District Court for the District of Nevada); Reorganized FLI, Inc. (formerly J.P. Morgan Trust Company) v. ONEOK, Inc., et al. (filed in the District Court of Wyandotte County, Kansas, in October 2005, transferred to MDL-1566 in the United States District Court for the District of Nevada); Learjet, Inc., et al. v. ONEOK, Inc., et al. (filed in the District Court of Wyandotte, Kansas, in November 2005, transferred to MDL-1566 in the United States District Court for the District of Nevada); Arandell Corporation, et al. v. Xcel Energy, Inc., et al. (filed in the Circuit Court for Dane County, Wisconsin, in December 2006, transferred to MDL-1566 in the United States District Court for the District of Nevada); Heartland Regional Medical Center, et al. v. ONEOK, Inc., et al. (filed in the Circuit Court of Buchanan County, Missouri, in March 2007, transferred to MDL-1566 in the United States District Court for the District of Nevada); NewPage Wisconsin System v. CMS Energy Resource Management Company, et al. (filed in the Circuit Court for Wood County, Wisconsin, in March 2009, transferred to MDL-1566 in the United States District Court for the District of Nevada and now consolidated with the Arandell case).  In each of these lawsuits, the plaintiffs allege that we, OESC and one other affiliate and approximately ten other energy companies and their affiliates engaged in an illegal scheme to inflate natural gas prices by providing false information to gas price index publications.  All of the complaints arise out of a CFTC investigation into and reports concerning false gas price index-reporting or manipulation in the energy marketing industry during the years from 2000 to 2002.

On July 18, 2011, the trial court granted judgments in favor of ONEOK, Inc., OESC and other unaffiliated entities in the following cases: Reorganized FLI, Learjet, Arandell, Heartland, and NewPage. The court also granted judgment in favor of OESC on all state law claims asserted in the Sinclair case. On August 18, 2011, the trial court entered an order approving a stipulation by the plaintiffs and our affiliate, Kansas Gas Marketing Company (“KGMC”), for a dismissal without prejudice of the plaintiffs’ claims against KGMC in the Learjet and Heartland cases.

On April 10, 2013, the United States Court of Appeals for the Ninth Circuit reversed the summary judgments that had been granted in favor of ONEOK, OESC and other unaffiliated defendants in the following cases: Reorganized FLI, Learjet, Arandell, Heartland and NewPage. The Ninth Circuit also reversed the summary judgment that had been granted in favor of OESC on all state law claims asserted in the Sinclair case. The Ninth Circuit remanded the cases back to the United States District Court for the District of Nevada for further proceedings. ONEOK, OESC and the other unaffiliated defendants filed a Petition for Writ of Certiorari with the United States Supreme Court on August 26, 2013. The Ninth Circuit has ordered the cases stayed until final disposition of the Petition for Writ of Certiorari.

Because of the uncertainty surrounding the Gas Index Pricing Litigation, including an insufficient description of the purported classes and other related matters, we cannot reasonably estimate a range of potential exposures at this time. However, it is reasonably possible that the ultimate resolution of these matters could result in future charges that may be material to our results of operations.

ITEM 4.    MINE SAFETY DISCLOSURES

Not applicable.



39


PART II

ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

MARKET INFORMATION AND HOLDERS

Our common stock is listed on the NYSE under the trading symbol “OKE.”  The corporate name ONEOK is used in newspaper stock listings.  The following table sets forth the high and low closing prices of our common stock for the periods indicated:
 
 
Year Ended
December 31, 2013
 
Year Ended
December 31, 2012
 
 
High
 
Low
 
High
 
Low
First Quarter
 
$
48.17

 
$
44.00

 
$
44.40

 
$
40.22

Second Quarter
 
$
52.13

 
$
41.16

 
$
43.98

 
$
39.49

Third Quarter
 
$
54.14

 
$
40.00

 
$
48.31

 
$
42.26

Fourth Quarter
 
$
62.18

 
$
52.54

 
$
49.39

 
$
42.07


At February 19, 2014, there were 15,321 holders of record of our 207,814,086 outstanding shares of common stock.

DIVIDENDS

The following table sets forth the quarterly dividends declared and paid per share of our common stock during the periods indicated:
 
 
Years Ended December 31,
 
 
2013
 
2012
 
2011
First Quarter
 
$
0.36

 
$
0.305

 
$
0.26

Second Quarter
 
$
0.36

 
$
0.305

 
$
0.26

Third Quarter
 
$
0.38

 
$
0.33

 
$
0.28

Fourth Quarter
 
$
0.38

 
$
0.33

 
$
0.28

Total
 
$
1.48

 
$
1.27

 
$
1.08


In January 2014, we declared a dividend of $0.40 per share ($1.60 per share on an annualized basis) which was paid on February 18, 2014, to shareholders of record as of February 10, 2014.

ISSUER PURCHASES OF EQUITY SECURITIES

We repurchased no shares of our common stock for the year ended December 31, 2013. The repurchase program, authorized by our Board of Directors in October 2010, terminated on December 31, 2013.

EMPLOYEE STOCK AWARD PROGRAM

Under our Employee Stock Award Program, we issued, for no monetary consideration, to all eligible employees one share of our common stock when the per-share closing price of our common stock on the NYSE was for the first time at or above $13 per share. Shares issued to employees under this program during 2013 totaled 63,975, and compensation expense related to the Employee Stock Award Plan was $3.6 million.  Shares issued to employees under this program during 2012 totaled 42,467, and compensation expense related to the Employee Stock Award Plan was $1.9 million. For 2011, the number of shares issued under this program totaled 295,694, and compensation expense related to the Employee Stock Award Plan was $16.0 million.

The total number of shares of our common stock available for issuance under this program is 900,000.  The shares issued under this program have not been registered under the Securities Act, in reliance upon the position taken by the SEC (see Release No. 6188, dated February 1, 1980) that the issuance of shares to employees pursuant to a program of this kind does not require registration under the Securities Act.  See Note M of the Notes to Consolidated Financial Statements in this Annual Report for additional information.


40


PERFORMANCE GRAPH

The following performance graph compares the performance of our common stock with the S&P 500 Index, the S&P Utilities Index and a ONEOK Peer Group during the period beginning on December 31, 2008, and ending on December 31, 2013.  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 $100 Investment Assuming Reinvestment of Dividends
at December 31, 2008, and at the End of Every Year Through December 31, 2013,
Among ONEOK, Inc., the S&P 500 Index, the S&P 500 Utilities Index and a ONEOK Peer Group
 
 
Cumulative Total Return
 
 
Years Ended December 31,
 
 
2009
 
2010
 
2011
 
2012
 
2013
 
 
 
 
 
 
 
 
 
 
 
ONEOK, Inc.
 
$
161.37

 
$
208.77

 
$
336.39

 
$
341.57

 
$
511.27

S&P 500 Index
 
$
126.45

 
$
145.52

 
$
148.55

 
$
172.29

 
$
228.04

S&P 500 Utilities Index (a)
 
$
111.93

 
$
118.08

 
$
141.52

 
$
143.35

 
$
162.35

ONEOK Peer Group (b)
 
$
131.60

 
$
172.60

 
$
209.60

 
$
215.80

 
$
270.00

(a) - The Standard & Poors 500 Utilities Index is comprised of the following companies: AES Corp.; AGL Resource, Inc.; Ameren Corp.; American Electric Power Co., Inc.; Centerpoint Energy, Inc.; CMS Energy Corp.; Consolidated Edison, Inc.; Dominion Resources, Inc.; DTE Energy Co.; Duke Energy Corp.; Edison International; Entergy Corp.; Exelon Corp.; FirstEnergy Corp.; Integrys Energy Group, Inc.; NextEra Energy, Inc.; NiSource, Inc.; Northeast Utilities; NRG Energy, Inc.; Pepco Holdings, Inc.; PG&E Corp.; Pinnacle West Capital Corp.; PPL Corp.; Public Service Enterprise Group, Inc.; SCANA Corp.; Sempra Energy; Southern Co.; TECO Energy, Inc.; Wisconsin Energy Corp.; and Xcel Energy, Inc.
(b) - The ONEOK Peer Group is comprised of the following companies: AGL Resources, Inc.; Atmos Energy Corp.; Centerpoint Energy, Inc.; DCP Midstream Partners, L.P.; Enbridge, Inc.; Enterprise Products Partners, L.P.; Energy Transfer Partners, L.P.; Kinder Morgan Energy Partners, L.P.; National Fuel Gas Co.; New Jersey Resources Corp.; NiSource, Inc.; OGE Energy Corp.; Piedmont Natural Gas Company, Inc.; Sempra Energy; Spectra Energy Corp.; Southwest Gas Corp.; TransCanada Corp.; UGI Corp.; Vectren Corp.; WGL Holdings, Inc.; and Wisconsin Energy Corp.


41


ITEM 6.    SELECTED FINANCIAL DATA

The following table sets forth our selected financial data for each of the periods indicated:
 
 
Years Ended December 31,
 
 
2013
 
2012
 
2011
 
2010
 
2009
 
 
(Millions of dollars except per share amounts)
Revenues
 
$
14,602.7

 
$
12,632.6

 
$
14,805.8

 
$
12,678.8

 
$
10,805.8

Income from continuing operations
 
$
577.0

 
$
729.3

 
$
757.5

 
$
540.1

 
$
483.7

Income from continuing operations attributable to ONEOK
 
$
266.5

 
$
346.3

 
$
358.4

 
$
333.4

 
$
297.9

Net income attributable to ONEOK
 
$
266.5

 
$
360.6

 
$
360.6

 
$
334.6

 
$
305.5

Total assets
 
$
17,707.6

 
$
15,855.3

 
$
13,696.6

 
$
12,499.2

 
$
12,827.7

Long-term debt, including current maturities
 
$
7,765.6

 
$
6,526.2

 
$
4,893.9

 
$
4,329.8

 
$
4,602.2

Earnings per share - continuing operations
 
 

 
 

 
 

 
 

 
 

Basic
 
$
1.29

 
$
1.68

 
$
1.71

 
$
1.57

 
$
1.41

Diluted
 
$
1.27

 
$
1.64

 
$
1.67

 
$
1.55

 
$
1.40

Earnings per share - total
 
 

 
 

 
 

 
 

 
 
Basic
 
$
1.29

 
$
1.75

 
$
1.72

 
$
1.57

 
$
1.45

Diluted
 
$
1.27

 
$
1.71

 
$
1.68

 
$
1.55

 
$
1.44

Dividends declared per common share
 
$
1.48

 
$
1.27

 
$
1.08

 
$
0.91

 
$
0.82


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 our audited consolidated financial statements and the Notes to Consolidated Financial Statements in this Annual Report.

RECENT DEVELOPMENTS

The following discussion highlights some of our planned activities, recent achievements and significant issues affecting us. 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 Operation and our consolidated financial statements and Notes to Consolidated Financial Statements for additional information.

Separation of Natural Gas Distribution Segment - In January 2014, our board of directors unanimously approved the separation of our natural gas distribution business into a standalone publicly traded company, which was completed on January 31, 2014. ONE Gas consists of ONEOK’s former Natural Gas Distribution segment that includes Kansas Gas Service, Oklahoma Natural Gas and Texas Gas Service. ONEOK shareholders of record at the close of business on January 21, 2014, retained their current shares of ONEOK stock and received one share of ONE Gas stock for every four shares of ONEOK stock owned in a transaction that was tax-free to ONEOK and its shareholders. In connection with the separation, we received a cash payment of approximately $1.13 billion from ONE Gas and utilized or will utilize the proceeds to repay all of our outstanding commercial paper and to repay approximately $550 million of long-term debt prior to maturity.

Wind Down of Energy Services Segment - As a result of challenging natural gas market conditions, in June 2013 we announced an accelerated wind down of our Energy Services segment that is expected to be substantially completed on March 31, 2014. Our Energy Services segment no longer fits strategically and has become increasingly smaller on a relative basis because of the market conditions that it has faced and the growth of our other businesses. We expect the Energy Services segment to be classified as discontinued operations after the completion of the accelerated wind down. See additional discussion in the “Financial Results and Operating Information” section of our Energy Services segment.

ONEOK and its subsidiaries will continue to own all of the general partner interest and limited partner interests, which, together, represent a 41.2 percent ownership interest at December 31, 2013, in ONEOK Partners (NYSE: OKS), one of the largest publicly traded master limited partnerships, and will operate our Energy Services segment through the completion of the wind down process, which will be substantially completed on March 31, 2014.

ONEOK Partners’ Growth Projects - Crude oil and natural gas producers continue to drill aggressively for crude oil and NGL-rich natural gas, and related development activities continue to progress in many regions where ONEOK Partners has

42


operations.  ONEOK Partners expects continued development of the crude oil and NGL-rich natural gas reserves in the Bakken Shale and Three Forks formations in the Williston Basin, the Niobrara Shale formation in the Powder River Basin and in the Cana-Woodford Shale, Woodford Shale, Granite Wash and Mississippian Lime areas in the Mid-Continent region.  In response to this increased production of crude oil, natural gas and NGLs, and higher demand for NGL products from the petrochemical industry, ONEOK Partners is investing approximately $6.0 billion to $6.4 billion in new capital projects and acquisitions from 2010 through 2016 including approximately $1.2 billion in new projects and acquisitions announced in 2013, to meet the needs of natural gas producers and processors in these regions and expand its natural gas liquids fractionation, distribution and storage infrastructure in the Gulf Coast region.  The execution of these capital investments aligns with ONEOK Partners’ focus to grow fee-based earnings. Acreage dedications and supply commitments from producers and natural gas processors in regions associated with ONEOK Partners’ growth projects are expected to provide incremental cash flows and long-term fee-based earnings .

ONEOK Partners’ Sage Creek Acquisition - On September 30, 2013, ONEOK Partners completed the acquisition of certain natural gas gathering and processing and natural gas liquids facilities in Converse and Campbell counties, Wyoming, in the NGL-rich Niobrara Shale formation of the Powder River Basin for $305 million. These assets consist primarily of a 50 MMcf/d natural gas processing facility, the Sage Creek plant, and related natural gas gathering and natural gas liquids infrastructure. Included in the acquisition were supply contracts providing for long-term acreage dedications from producers in the area, which are structured with POP and fee-based contractual terms. ONEOK Partners plans to invest approximately $135 million, excluding AFUDC, to upgrade and construct natural gas gathering and processing infrastructure and natural gas liquids gathering pipelines. The acquisition is complementary to ONEOK Partners’ existing natural gas liquids assets and provides additional natural gas gathering and processing and natural gas liquids gathering capacity in a region where producers are actively drilling for crude oil and NGL-rich natural gas. For additional discussion, see Note Q of the Notes to Consolidated Financial Statements.

See discussion of ONEOK Partners’ growth projects in the “Financial Results and Operating Information” section for our ONEOK Partners segment.

Dividends/Distributions - During 2013, we paid dividends totaling $1.48 per share, an increase of approximately 17 percent over the $1.27 per share paid during 2012.  We declared a quarterly dividend of $0.40 per share ($1.60 per share on an annualized basis) in January 2014, an increase of approximately 6 percent over the $0.36 declared in January 2013.  During 2013, ONEOK Partners paid cash distributions totaling $2.87 per unit, an increase of approximately 11 percent from the $2.59 per unit paid during 2012.  ONEOK Partners paid total cash distributions to us in 2013 of $909.7 million, which includes $639.9 million resulting from our limited-partner interest and $269.9 million related to our general partner interest.  A cash distribution from ONEOK Partners of $0.73 per unit ($2.92 per unit on an annualized basis) was declared in January 2014, an increase of approximately 3 percent from the $0.71 declared in January 2013.

ONEOK Partners Credit Agreement - Effective January 31, 2014, ONEOK Partners amended its Partnership Credit Agreement to increase the size of the facility to $1.7 billion from $1.2 billion and to extend the maturity to January 2019.

ONEOK Credit Agreement - Effective January 31, 2014, we amended the ONEOK Credit Agreement, which reduced the size of our credit facility to $300 million from $1.2 billion and extended the maturity to January 2019.

ONE Gas Credit Agreement - In December 2013, ONE Gas entered into the ONE Gas Credit Agreement, which became effective upon the separation of the natural gas distribution business on January 31, 2014.

ONEOK Partners Debt Issuance - In September 2013, ONEOK Partners completed an underwritten public offering of $1.25 billion of senior notes generating net proceeds of approximately $1.24 billion. The proceeds were used to pay down commercial paper and for general partnership purposes.

ONEOK Partners Equity Issuances - In August 2013, ONEOK Partners completed an underwritten public offering of 11.5 million common units, generating total net proceeds of approximately $553.3 million.  In conjunction with the issuances, we contributed approximately $11.6 million in order to maintain our 2 percent general partner interest. ONEOK Partners used a portion of the proceeds from its August 2013 equity issuance to pay amounts outstanding under its commercial paper program and the balance was used for general partnership purposes.

ONEOK Partners has an “at-the-market” equity program for the offer and sale from time to time of its common units up to an aggregate amount of $300 million. The program allows ONEOK Partners to offer and sell its common units through a sales agent at prices it deems appropriate. Sales of common units are made by means of ordinary brokers’ transactions on the NYSE, in block transactions, or as otherwise agreed to between ONEOK Partners and the sales agent. ONEOK Partners is under no

43


obligation to offer and sell common units under the program. During the year ended December 31, 2013, ONEOK Partners sold approximately 681 thousand common units through this program that resulted in net proceeds, including our contribution to maintain our 2 percent general partner interest in ONEOK Partners, of approximately $36.1 million. ONEOK Partners used the proceeds for general partnership purposes.

As a result of these transactions, our aggregate ownership interest in ONEOK Partners decreased to 41.2 percent at December 31, 2013 compared with 43.4 percent at December 31, 2012.

See Note Q for a discussion of ONEOK Partners’ issuance of common units and distributions to noncontrolling interests.

ONE Gas Debt Issuance - In January 2014, ONE Gas completed a private placement of three series of Senior Notes with an aggregate value of $1.2 billion and received approximately $1.19 billion from the offering, net of issuance costs. ONE Gas paid to ONEOK approximately $1.13 billion in cash from the proceeds of the offering.

FINANCIAL RESULTS AND OPERATING INFORMATION

Consolidated Operations

Selected Financial Results - The following table sets forth certain selected financial results for the periods indicated:
 
 
 
 
 
 
Variances
 
Variances
 
 
Years Ended December 31,
 
2013 vs. 2012
 
2012 vs. 2011
Financial Results
 
2013
 
2012
 
2011
 
Increase (Decrease)
 
Increase (Decrease)
 
 
(Millions of dollars)
Revenues
 
$
14,602.7

 
$
12,632.6

 
$
14,805.8

 
$
1,970.1

 
16
 %
 
$
(2,173.2
)
 
(15
)%
Cost of sales and fuel
 
12,313.0

 
10,281.7

 
12,425.4

 
2,031.3

 
20
 %
 
(2,143.7
)
 
(17
)%
Net margin
 
2,289.7

 
2,350.9

 
2,380.4

 
(61.2
)
 
(3
)%
 
(29.5
)
 
(1
)%
Operating costs
 
990.5

 
909.0

 
908.3

 
81.5

 
9
 %
 
0.7

 
 %
Depreciation and amortization
 
384.4

 
335.8

 
312.2

 
48.6

 
14
 %
 
23.6

 
8
 %
Goodwill impairment
 

 
10.3

 

 
(10.3
)
 
(100
)%
 
10.3

 
100
 %
Gain (loss) on sale of assets
 
11.9

 
6.7

 
(1.0
)
 
5.2

 
78
 %
 
7.7

 
*

Operating income
 
$
926.7

 
$
1,102.5

 
$
1,158.9

 
$
(175.8
)
 
(16
)%
 
$
(56.4
)
 
(5
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity earnings from investments
 
$
110.5

 
$
123.0

 
$
127.2

 
$
(12.5
)
 
(10
)%
 
$
(4.2
)
 
(3
)%
Interest expense
 
$
(334.2
)
 
$
(302.3
)
 
$
(297.0
)
 
$
31.9

 
11
 %
 
$
5.3

 
2
 %
Net income
 
$
577.0

 
$
743.5

 
$
759.7

 
$
(166.5
)
 
(22
)%
 
$
(16.2
)
 
(2
)%
Net income attributable to
noncontrolling interests
 
$
310.4

 
$
382.9

 
$
399.2

 
$
(72.5
)
 
(19
)%
 
$
(16.3
)
 
(4
)%
Net income attributable to ONEOK
 
$
266.5

 
$
360.6

 
$
360.6

 
$
(94.1
)
 
(26
)%
 
$

 
 %
Capital expenditures
 
$
2,256.6

 
$
1,866.2

 
$
1,336.1

 
$
390.4

 
21
 %
 
$
530.1

 
40
 %
* Percentage change is greater than 100 percent.

2013 vs. 2012 - Revenues for 2013, compared with 2012, increased primarily due to higher natural gas and NGL volumes gathered, processed and sold from ONEOK Partners’ completed capital projects, offset partially by lower net realized natural gas and NGL product prices, and ethane rejection in ONEOK Partners’ business. The increase in natural gas supply resulting from the development of nonconventional resource areas in North America has contributed to lower NGL product prices and narrower NGL product price differentials, and narrower natural gas location and seasonal price differentials, compared with 2012, in the markets ONEOK Partners serves. Our former Natural Gas Distribution segment benefited from new rates and higher sales volumes, primarily due to colder than normal weather in all three states where it operates.

Net margin for 2013, compared with 2012, decreased due primarily to noncash charges related to the accelerated wind down of the Energy Services segment from the release of a significant portion of its natural gas transportation and storage contracts to third parties.

Operating income for 2013 reflects higher results from our former Natural Gas Distribution segment, offset by lower results from our ONEOK Partners and Energy Services segments. Operating costs and depreciation and amortization increased for 2013, compared with 2012, due primarily to the growth of ONEOK Partners’ operations related to the completed capital

44


projects in its natural gas gathering and processing and natural gas liquids businesses and higher employee-related costs in the Natural Gas Distribution segment. Operating costs for 2013 also reflect approximately $9.4 million in costs incurred related to the separation of the natural gas distribution business.

Interest expense increased in 2013, compared with 2012, primarily as a result of higher interest costs incurred associated with a full year of interest costs on ONEOK Partners’ issuance of $1.3 billion of senior notes in September 2012 and interest costs on ONEOK Partners’ issuance of $1.25 billion of senior notes in September 2013. This was offset partially by higher capitalized interest associated with ONEOK Partners’ investments in growth projects in its natural gas gathering and processing and natural gas liquids businesses.

Net income attributable to noncontrolling interests reflects primarily the earnings of ONEOK Partners attributable to the portion of ONEOK Partners that we do not own.

Capital expenditures increased for 2013, compared with 2012, due primarily to the growth projects in ONEOK Partners’ natural gas gathering and processing and natural gas liquids businesses.

2012 vs, 2011 - Revenues for 2012, compared with 2011, decreased due to lower net realized natural gas and NGL product prices, offset partially by higher natural gas and NGL sales volumes from ONEOK Partners’ completed capital projects. The increase in natural gas supply resulting from the development of nonconventional resource areas in North America and a warmer than normal winter in 2012 caused lower natural gas prices and narrower natural gas location and seasonal price differentials in the markets ONEOK Partners served.  NGL prices, particularly ethane and propane, also decreased in 2012 due primarily to increased NGL production growth from the development of NGL-rich areas. Propane prices also were affected by a warmer than normal winter. During the second half of 2012, NGL location price differentials also narrowed due to strong production growth, increased demand in the Mid-Continent region and increased capacity available on pipelines that connect the Mid-Continent and Gulf Coast market centers.

Operating income for 2012 reflected higher results from our ONEOK Partners and Natural Gas Distribution segments, offset by lower results from our Energy Services segment. Our ONEOK Partners segment’s results benefited from higher volumes from completed capital projects in its natural gas gathering and processing and natural gas liquids businesses. These increases were offset partially by less favorable NGL product price differentials and lower NGL transportation capacity available for optimization activities in ONEOK Partners natural gas liquids business. Additionally, the increase was offset by higher compression and processing costs and lower realized natural gas and NGL product prices, particularly ethane and propane, in its natural gas gathering and processing business. Our Natural Gas Distribution segment benefited from new rates in all three states where it operates and lower operating costs.

These increases were offset by lower margins in our Energy Services segment due primarily to the impact of lower realized natural gas prices due to narrower natural gas seasonal and location price differentials and the impact of our hedging strategies on our storage and marketing and transportation margins and a nonrecurring goodwill impairment charge in the first quarter 2012.

Operating costs for 2012 were relatively unchanged due primarily to the increased costs associated with our ONEOK Partners segment’s expanding operations as a result of several internal growth projects that were placed in service and scheduled maintenance costs being offset by lower employee-related costs in our Natural Gas Distribution and Energy Services segments.

Interest expense increased in 2012, compared with 2011, primarily as a result of higher interest costs from ONEOK’s $700 million debt issuance in January 2012 and ONEOK Partners’ $1.3 billion debt issuance in September 2012, offset partially by higher capitalized interest associated with ONEOK Partners’ growth projects in its natural gas gathering and processing and natural gas liquids businesses.

Net income attributable to noncontrolling interests reflects primarily the earnings of ONEOK Partners attributable to the portion of ONEOK Partners that we do not own.

Capital expenditures increased in 2012, compared with 2011, due to the growth projects in ONEOK Partners’ natural gas gathering and processing and natural gas liquids businesses.

More information regarding our results of operations is provided in the following discussion of operating results for each of our segments.


45


ONEOK Partners

Growth Projects - Natural gas gathering and processing projects - ONEOK Partners’ natural gas gathering and processing business is investing approximately $3.0 billion to $3.3 billion from 2010 through 2016 in growth projects, including approximately $950 million in new projects and acquisitions announced in 2013, in NGL-rich areas including the Williston Basin, Cana-Woodford Shale and the Niobrara shale in the Powder River Basin that ONEOK Partners expects will enable it to meet the rapidly growing needs of crude oil and natural gas producers in those areas.

Williston Basin Processing Plants and related projects - ONEOK Partners’ projects in this basin include five 100 MMcf/d natural gas processing facilities: the Garden Creek, Garden Creek II and Garden Creek III plants located in McKenzie County, North Dakota, and the Stateline I and Stateline II plants located in Williams County, North Dakota. ONEOK Partners also plans to construct a 200 MMcf/d processing facility, the Lonesome Creek plant, located in McKenzie County, North Dakota. ONEOK Partners has acreage dedications of approximately 3.1 million acres supporting these plants.  In addition, ONEOK Partners is expanding and upgrading its existing natural gas gathering and compression infrastructure and also adding new well connections associated with these plants.  The Garden Creek plant was placed in service in December 2011 and, together with the related infrastructure, cost approximately $360 million, excluding AFUDC.  ONEOK Partners expects construction costs, excluding AFUDC, for the Garden Creek II plant and related infrastructure will be $310 million to $345 million, and for the Garden Creek III plant and related infrastructure will be approximately $325 million to $360 million. The Garden Creek II and Garden Creek III plants are expected to be completed during the third quarter 2014 and the first quarter 2015, respectively. The Stateline I natural gas processing facility was placed in service in September 2012, and the Stateline II natural gas processing facility was placed in service in April 2013. Together, with the related infrastructure, the Stateline I and Stateline II plants cost approximately $565 million, excluding AFUDC. ONEOK Partners expects construction costs, excluding AFUDC, for the Lonesome Creek natural gas gathering plant and related infrastructure will be approximately $550 million to $680 million. The Lonesome Creek plant is expected to be completed in the fourth quarter 2015.

ONEOK Partners is investing $150 million, excluding AFUDC, to construct a 270-mile natural gas gathering system and related infrastructure in Divide County, North Dakota.  The system gathers and transports natural gas from producers in the Bakken Shale and Three Forks formations in the Williston Basin to ONEOK Partners’ Stateline natural gas processing facilities in Williams County, North Dakota.  ONEOK Partners has secured long-term acreage dedications from producers for this new system, which are structured with POP and fee-based contractual terms. Portions of the system were placed in service during the second quarter 2013, and the remaining system expansion is expected to be completed by the end of 2014.

Sage Creek acquisition and related projects - On September 30, 2013, ONEOK Partners completed the acquisition of certain natural gas gathering and processing and natural gas liquids facilities in the NGL-rich Niobrara Shale area of the Powder River Basin, which includes a 50 MMcf/d natural gas processing facility, the Sage Creek plant, and related natural gas gathering infrastructure. Included in the acquisition were supply contracts providing for long-term acreage dedications from producers in the area, which are structured with POP and fee-based contractual terms. ONEOK Partners plans to invest approximately $50 million, excluding AFUDC, through 2016 to upgrade and construct natural gas gathering and processing infrastructure.

Cana-Woodford Shale projects - ONEOK Partners is investing approximately $340 million to $360 million to construct a new 200 MMcf/d natural gas processing facility, the Canadian Valley plant, and related infrastructure in the Cana-Woodford Shale in Canadian County, Oklahoma, in close proximity to its existing natural gas transportation and natural gas liquids gathering pipelines.  The additional natural gas processing infrastructure is necessary to accommodate increased production of NGL-rich natural gas in the Cana-Woodford Shale where ONEOK Partners has substantial acreage dedications from active producers. The new Canadian Valley plant is expected to be completed in March 2014.  The related additional infrastructure is expected to increase ONEOK Partners’ capacity to gather and process natural gas to approximately 390 MMcf/d in the Cana-Woodford Shale.

In all of ONEOK Partners’ growth project areas, nearly all of the new gas production is from horizontally drilled and completed wells. These wells tend to produce at higher initial volumes resulting generally in higher initial decline rates than conventional vertical wells; however, the decline rates flatten out over time.  These wells are expected to have long productive lives.  ONEOK Partners expects the routine growth capital needed to connect to new wells and expand its infrastructure to increase compared with its historical levels of routine growth capital.

Natural gas liquids projects - The growth strategy in ONEOK Partners’ natural gas liquids business 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 into Texas.  Increasing crude oil, natural gas and NGL production resulting from this activity and higher petrochemical industry demand for NGL products have required ONEOK Partners to make additional capital investments to expand its infrastructure to bring these commodities from supply basins to market.  Expansion of the

46


petrochemical industry in the United States is expected to increase ethane demand significantly in the next two to four years, and international demand for NGLs, particularly propane, is expected to increase into the future.

ONEOK Partners’ natural gas liquids business is investing approximately $3.0 billion to $3.1 billion in NGL-related projects from 2010 through 2016, including approximately $250 million in new projects and acquisitions announced in 2013.  These investments will accommodate the transportation and fractionation of growing NGL supply from shale and other resource development areas across ONEOK Partners’ asset base and alleviate infrastructure constraints between the Mid-Continent and Gulf Coast market centers to meet increasing petrochemical industry and NGL export demand in the Gulf Coast.  Over time, these growing fee-based NGL volumes are expected to fill much of ONEOK Partners’ natural gas liquids pipeline capacity used historically to capture the NGL price differentials between the two market centers.  

During 2013, NGL location price differentials remained narrow between the Mid-Continent and Gulf Coast market centers. ONEOK Partners expects these narrower NGL price differentials to persist as new fractionators and pipelines, including ONEOK Partners’ growth projects discussed below, continue to alleviate constraints between the Conway, Kansas, and Mont Belvieu, Texas, natural gas liquids market centers.

Sterling III Pipeline - ONEOK Partners is constructing a 540-plus-mile natural gas liquids pipeline, the Sterling III Pipeline, which will have the flexibility to transport either unfractionated NGLs or NGL products from the Mid-Continent to the Gulf Coast.  The Sterling III Pipeline will traverse the NGL-rich Woodford Shale that is currently under development, as well as provide transportation capacity for the growing NGL production from the Cana-Woodford Shale and Granite Wash areas, where the pipeline can gather unfractionated NGLs from new natural gas processing plants that are being built as a result of NGL supply growth in these areas.  The Sterling III Pipeline is designed to transport up to 193 MBbl/d of NGL production from ONEOK Partners’ natural gas liquids infrastructure at Medford, Oklahoma, to its storage and fractionation facilities in Mont Belvieu, Texas.  ONEOK Partners has multi-year supply commitments from producers and natural gas processors for approximately 75 percent of the pipeline’s capacity.  Installation of additional pump stations could expand the capacity of the pipeline to 250 MBbl/d.  The pipeline is expected to be completed in March 2014.

The project also includes reconfiguration of its existing Sterling I and Sterling II pipelines, which currently distribute NGL products between the Mid-Continent and Gulf Coast natural gas liquids market centers, to transport either unfractionated NGLs or NGL products. The project costs for the new pipeline and reconfiguration projects are estimated to be $750 million to $800 million, excluding AFUDC.

MB-2 Fractionator - In December 2013, ONEOK Partners placed in service a 75 MBbl/d fractionator, MB-2, near its storage facility in Mont Belvieu, Texas.  ONEOK Partners has multi-year supply commitments from producers and natural gas processors for all of the fractionator’s capacity. The project cost approximately $375 million, excluding AFUDC.

MB-3 Fractionator - ONEOK Partners is constructing an additional 75 MBbl/d fractionator, MB-3, near its storage facility in Mont Belvieu, Texas.  In addition, ONEOK Partners plans to expand and upgrade its existing natural gas liquids gathering and pipeline infrastructure, including new connections to natural gas processing facilities and increasing the capacity of the Arbuckle and Sterling II natural gas liquids pipelines.  The MB-3 fractionator and related infrastructure are expected to cost approximately $525 million to $575 million, excluding AFUDC.  The MB-3 fractionator is expected to be completed in the fourth quarter 2014.   ONEOK Partners has multi-year supply commitments from producers and natural gas processors for approximately 80 percent of the fractionator’s capacity.

Ethane Header Pipeline - In April 2013, ONEOK Partners placed in service a 12-inch diameter ethane header pipeline that creates a new point of interconnection between its Mont Belvieu, Texas, NGL fractionation and storage assets and several petrochemical customers. The new pipeline was designed to transport up to 400 MBbl/d from its 80 percent-owned, 160-MBbl/d MB-1 fractionator and its wholly owned 75-MBbl/d MB-2 and MB-3 fractionators and its ethane/propane splitter that are currently under construction. The project cost approximately $23 million, excluding AFUDC.

Ethane/Propane Splitter - ONEOK Partners is constructing a new 40-MBbl/d ethane/propane splitter at its Mont Belvieu storage facility to split ethane/propane mix into purity ethane in order to meet the needs of petrochemical customers, which ONEOK Partners expects will grow over the long term. The facility will be capable of producing 32 MBbl/d of purity ethane and 8 MBbl/d of propane, and is expected to be completed in March 2014.  The ethane/propane splitter is expected to cost approximately $46 million, excluding AFUDC.

Bakken NGL Pipeline and related projects - The Bakken NGL Pipeline, a 600-mile natural gas liquids pipeline with designed capacity to transport 60 MBbl/d of unfractionated NGLs from the Williston Basin to the Overland Pass Pipeline, was placed in service in April 2013.  The unfractionated NGLs then are delivered to ONEOK Partners’ existing natural gas liquids

47


fractionation and distribution infrastructure in the Mid-Continent.  NGL supply commitments for the Bakken NGL Pipeline are anchored by NGL production from ONEOK Partners’ natural gas processing plants. The pipeline cost approximately $455 million, excluding AFUDC.

ONEOK Partners is investing an additional $100 million to install additional pump stations on the Bakken NGL Pipeline to increase its capacity to 135 MBbl/d from the original design capacity of 60 MBbl/d. The expansion is expected to be completed in the third quarter 2014. ONEOK Partners also plans to invest approximately $100 million to complete a second expansion of the Bakken NGL Pipeline to increase its capacity to 160 MBbl/d. This expansion is expected to be completed in the second quarter 2016.

The unfractionated NGLs from the Bakken NGL Pipeline and other supply sources under development in the Rocky Mountain region required installing additional pump stations and expanding existing pump stations on the Overland Pass Pipeline in which ONEOK Partners owns a 50 percent equity interest.  These additions and expansions were completed in the second quarter 2013 and increased the capacity of the Overland Pass Pipeline to 255 MBbl/d.  ONEOK Partners’ share of the costs for this project was approximately $36 million, excluding AFUDC.

Sage Creek-related infrastructure - On September 30, 2013, ONEOK Partners completed the acquisition of certain natural gas gathering and processing and natural gas liquids facilities in the NGL-rich Niobrara Shale area of the Powder River Basin which includes a natural gas liquids pipeline.  The acquired natural gas liquids pipeline will be integrated into ONEOK Partners’ natural gas liquids system and used as a platform for future growth opportunities. ONEOK Partners plans to invest approximately $85 million, excluding AFUDC, to build new NGL pipeline infrastructure and connect the Sage Creek natural gas processing plant to its Bakken NGL Pipeline. These projects are expected to be completed in the fourth quarter 2014.

Bushton Fractionator expansion - In September 2012, ONEOK Partners placed in service an expansion and upgrade to its existing NGL fractionation capacity at Bushton, Kansas, increasing capacity to 210 MBbl/d from 150 MBbl/d. This additional capacity is necessary to accommodate the volume growth from the Mid-Continent and Williston Basin. The project cost approximately $117 million, excluding AFUDC.

Natural gas liquids pipeline and modification of Hutchinson fractionation infrastructure - ONEOK Partners plans to invest approximately $140 million, excluding AFUDC, to construct a new 95-mile natural gas liquids pipeline that will connect its existing natural gas liquids fractionation and storage facilities in Hutchinson, Kansas, to similar facilities in Medford, Oklahoma. These projects also include related modifications to existing natural gas liquids fractionation infrastructure at Hutchinson, Kansas, to accommodate additional unfractionated NGLs produced in the Williston Basin. The pipeline and related modifications are expected to be completed during the first quarter 2015.

Cana-Woodford Shale and Granite Wash projects - ONEOK Partners constructed approximately 230 miles of natural gas liquids pipelines that expanded its existing Mid-Continent natural gas liquids gathering system in the Cana-Woodford Shale and Granite Wash areas.  These pipelines expanded ONEOK Partners’ capacity to transport unfractionated NGLs from these Mid-Continent supply areas to fractionation facilities in Oklahoma and Texas and distribute NGL products to the Mid-Continent, Gulf Coast and upper Midwest market centers.  The pipelines are connected to three new third-party natural gas processing facilities and to three existing third-party natural gas processing facilities that were expanded.  Additionally, ONEOK Partners installed additional pump stations on the Arbuckle Pipeline to increase its capacity to 240 MBbl/d.  These projects added, through multi-year supply contracts, approximately 75 to 80 MBbl/d of unfractionated NGLs, to ONEOK Partners’ existing natural gas liquids gathering systems.  These projects were placed in service in April 2012 and cost approximately $220 million, excluding AFUDC.

For a discussion of ONEOK Partners’ capital expenditure financing, see “Capital Expenditures” in “Liquidity and Capital Resources”.

Selected Financial Results and Operating Information - ONEOK Partners’ 2013 and 2012 operating results reflect the benefits from the following completed growth projects:
the Bakken NGL Pipeline, which was placed in service in April 2013;
the Stateline II natural gas processing plant, which was placed in service in April 2013;
the Divide County, North Dakota, natural gas gathering system, portions of which were placed in service in the second quarter 2013;
the expansion of its Overland Pass Pipeline, portions of which were placed in service in the second quarter 2013;
the Ethane Header Pipeline, which was placed in service in April 2013;
the Stateline I natural gas processing plant, which was placed in service in September 2012;

48


the expansion of its Bushton natural gas liquids fractionator, which was placed in service in September 2012; and
the expansion of its Mid-Continent natural gas liquids gathering system in the Cana-Woodford Shale and Granite Wash areas, which was placed in service in April 2012.

These projects have resulted in additional natural gas volumes gathered and sold, and additional natural gas liquids volumes gathered, fractionated and transported across ONEOK Partners’ natural gas liquids systems; however, the volumes fractionated and transported decreased in 2013 due to the ethane rejection. ONEOK Partners expects these investments, along with its other announced growth projects, will accommodate the growing NGL supply from shale and other resource development areas across its asset base and will continue to alleviate infrastructure constraints between the Mid-Continent and Texas Gulf coast regions to meet the increasing petrochemical industry and NGL export demand.

The following table sets forth certain selected financial results for our ONEOK Partners segment for the periods indicated:
 
 
 
 
 
 
Variances
 
Variances
 
 
Years Ended December 31,
 
2013 vs. 2012
 
2012 vs. 2011
Financial Results
 
2013
 
2012
 
2011
 
Increase (Decrease)
 
Increase (Decrease)
 
 
(Millions of dollars)
Revenues
 
$
11,869.3

 
$
10,182.2

 
$
11,322.6

 
$
1,687.1

 
17
 %
 
$
(1,140.4
)
 
(10
)%
Cost of sales and fuel
 
10,222.2

 
8,540.4

 
9,745.2

 
1,681.8

 
20
 %
 
(1,204.8
)
 
(12
)%
Net margin
 
$
1,647.1

 
$
1,641.8

 
$
1,577.4

 
5.3

 
 %
 
64.4

 
4
 %
Operating costs
 
521.6

 
482.5

 
459.4

 
39.1

 
8
 %
 
23.1

 
5
 %
Depreciation and amortization
 
236.7

 
203.1

 
177.5

 
33.6

 
17
 %
 
25.6

 
14
 %
Gain (loss) on sale of assets
 
11.9

 
6.7

 
(1.0
)
 
5.2

 
78
 %
 
7.7

 
*

Operating income
 
$
900.7

 
$
962.9

 
$
939.5

 
$
(62.2
)
 
(6
)%
 
$
23.4

 
2
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity earnings from investments
 
$
110.5

 
$
123.0

 
$
127.2

 
$
(12.5
)
 
(10
)%
 
$
(4.2
)
 
(3
)%
Interest expense
 
$
(236.7
)
 
$
(206.0
)
 
$
(223.1
)
 
$
30.7

 
15
 %
 
$
(17.1
)
 
(8
)%
Capital expenditures
 
$
1,939.3

 
$
1,560.5

 
$
1,063.4

 
$
378.8

 
24
 %
 
$
497.1

 
47
 %
Cash paid for acquisitions
 
$
394.9

 
$

 
$

 
$
394.9

 
*

 
$

 
 %
* Percentage change is greater than 100 percent.

2013 vs. 2012 - Revenues and net margin for 2013, compared with 2012, increased due to higher natural gas and NGL volumes gathered, processed and sold from ONEOK Partners’ completed capital projects, offset partially by lower net realized natural gas and NGL product prices and ethane rejection.  The increase in natural gas supply resulting from the development of nonconventional resource areas in North America has contributed to generally lower NGL prices and narrower NGL price differentials, and narrower natural gas location and seasonal price differentials, compared with 2012, in the markets ONEOK Partners serves. However, in December 2013, the price of propane increased significantly, and the price differential for propane between the Conway, Kansas, and Mont Belvieu, Texas, market centers also widened in favor of Conway, Kansas, due to colder than normal weather and lower propane inventory levels. ONEOK Partners expects these prices to continue through the end of the 2014 winter heating season, which we expect will have a favorable impact on ONEOK Partners’ first-quarter 2014 financial results.

NGL location price differentials were significantly narrower between the Mid-Continent market center at Conway, Kansas, and the Gulf Coast market center at Mont Belvieu, Texas, for 2013, compared with 2012, due primarily to strong NGL production growth from the development of NGL-rich areas, exceeding the petrochemical industry’s capacity to consume the increased supply, resulting in higher ethane inventory levels at Mont Belvieu. Additionally, an unusually long maintenance outage season in the petrochemical industry during 2013 reduced ethane demand, which also contributed to the higher ethane inventory levels.

The differential between the composite price of NGL products and the price of natural gas, particularly the differential between ethane and natural gas, has influenced the volume of NGLs recovered from natural gas processing plants. The low ethane prices have resulted in ethane rejection at many of ONEOK Partners’ natural gas processing plants and some of its customers’ natural gas processing plants connected to its natural gas liquids system in the Mid-Continent and Rocky Mountain regions during 2013. ONEOK Partners continues to expect that natural gas liquids volumes will be affected negatively as a result of ethane rejection. ONEOK Partners expects ethane rejection will persist through much of 2016, after which new world-scale ethylene production capacity is expected to begin coming on line, although market conditions may result in periods where it is economical to recover the ethane component in the natural gas stream. ONEOK Partners expects ethane rejection will have a significant impact on its financial results during this period. However, ONEOK Partners’ natural gas liquids business’s integrated assets enable it to mitigate partially the impact of ethane rejection through minimum volume commitments and the

49


utilization of the transportation capacity made available due to ethane rejection to capture additional NGL location price differentials in its optimization activities. In addition, new NGL supply commitments are expected to increase volumes in 2014 through 2016 to mitigate further the impact of ethane rejection on its natural gas liquids business.

Net margin increased primarily as a result of the following:
an increase of $166.5 million in exchange-services margins, which resulted from higher NGL volumes gathered, contract renegotiations for higher fees in ONEOK Partners’ NGL exchange-services activities and higher revenues from customers with minimum volume obligations in ONEOK Partners’ natural gas liquids business;
an increase of $100.1 million due primarily to volume growth in the Williston Basin from ONEOK Partners’ Stateline I and Stateline II natural gas processing plants and increased well connections resulting in higher natural gas volumes gathered, compressed, processed, transported and sold, higher NGL volumes sold and higher fees in ONEOK Partners’ natural gas gathering and processing business;
an increase of $19.5 million due to the impact of operational measurement gains of approximately $9.7 million in 2013 compared with losses of approximately $9.8 million in 2012 in ONEOK Partners’ natural gas liquids business;
an increase of $10.5 million in storage margins due primarily to contract renegotiations in ONEOK Partners’ natural gas liquids business;
an increase of $9.6 million in transportation margins due primarily to higher rates on Guardian Pipeline and higher contracted capacity with natural gas producers on our intrastate pipelines in ONEOK Partners’ natural gas pipelines business;
an increase of $6.4 million due to a contract settlement in 2013 in ONEOK Partners’ natural gas gathering and processing business; offset partially by
a decrease of $162.7 million in optimization and marketing margins, which resulted from a $202.5 million decrease due primarily to significantly narrower NGL location price differentials in ONEOK Partners’ natural gas liquids business. This decrease was offset partially by an increase of $35.7 million due primarily to more favorable NGL product price differentials;
a decrease of $48.8 million resulting from the impact of ethane rejection, which resulted in lower NGL volumes in ONEOK Partners’ natural gas liquids business;
a decrease of $41.7 million due primarily to lower net realized NGL prices in ONEOK Partners’ natural gas gathering and processing business;
a decrease of $22.4 million related to lower isomerization volumes, resulting from the narrower price differential between normal butane and iso-butane in ONEOK Partners’ natural gas liquids business;
a decrease of $13.4 million due primarily to changes in contract mix and terms associated with our volume growth in ONEOK Partners’ natural gas gathering and processing business;
a decrease of $3.9 million from lower net retained fuel in ONEOK Partners’ natural gas pipelines business; and
a decrease of $3.5 million due to lower dry natural gas volumes gathered as a result of continued declines in coal-bed methane production in the Powder River Basin in ONEOK Partners’ natural gas gathering and processing business.

Operating costs increased for 2013, compared with 2012, as a result of the growth of ONEOK Partners operations and reflect the following:
an increase of $17.7 million in employee-related costs due to higher labor and employee benefit costs, offset partially by lower incentive compensation costs;
an increase of $18.0 million in higher materials and supplies, and outside service expenses; and
an increase of $6.9 million due to higher ad valorem taxes.

Depreciation and amortization increased due primarily to the higher depreciation expense associated with ONEOK Partners’ completed capital projects discussed above.

Interest expense increased for 2013, compared with 2012, primarily as a result of higher interest costs incurred associated with a full year of interest costs on ONEOK Partners’ issuance of $1.3 billion of senior notes in September 2012 and issuance of $1.25 billion of senior notes in September 2013, offset partially by higher capitalized interest associated with ONEOK Partners’ investments in the growth projects in its natural gas gathering and processing and natural gas liquids businesses.

Capital expenditures increased for 2013, compared with 2012, due primarily to the growth projects in ONEOK Partners’ natural gas gathering and processing and natural gas liquids businesses. In 2013, ONEOK Partners also acquired natural gas processing and natural gas liquids facilities in the NGL-rich Niobrara shale area of the Powder River Basin, the Sage Creek acquisition, and the remaining 30 percent interest in its Maysville, Oklahoma, natural gas processing facility.


50


Commodity-Price Risk - ONEOK Partners’ natural gas gathering business is exposed to commodity-price risk as a result of receiving commodities in exchange for its services.  A small percentage of its services, based on volume, are provided through keep-whole contracts.  See discussion regarding our commodity-price risk under “Commodity-Price Risk” in Item 7A, Quantitative and Qualitative Disclosures about Market Risk.

Equity Investments - Equity earnings from ONEOK Partners’ investments decreased in 2013 compared with 2012. In 2013, Northern Border Pipeline reduced transportation rates as a result of a rate settlement, effective January 1, 2013. The new long-term transportation rates are approximately 11 percent lower than previous rates. In 2013, there were declines in volumes gathered by ONEOK Partners’ equity investments in the Powder River Basin. Higher volumes were delivered to Overland Pass Pipeline from ONEOK Partners’ Bakken NGL Pipeline, which was placed in service in April 2013. The increased equity earnings from higher Bakken NGL Pipeline volumes were offset partially by reduced volumes as a result of ethane rejection.

Low natural gas prices and the relatively higher crude oil and NGL prices, compared with natural gas on a heating-value basis, have caused producers to focus their development efforts on crude oil and NGL-rich supply basins rather than areas with dry natural gas production, such as the coal-bed methane areas in the Powder River Basin.  The reduced coal-bed methane development activities and production declines in the dry natural gas formations of the Powder River Basin resulted in lower natural gas volumes available to be gathered.  While the reserve potential in the dry natural gas formations of the Powder River Basin still exists, future drilling and development will be affected by commodity prices and producers’ alternative prospects.  A continued decline in volumes gathered in this area may reduce ONEOK Partners’ ability to recover the carrying value of its assets and equity investments and could result in noncash charges to earnings.

Due to recent reductions in producer activity and declines in natural gas volumes gathered in the coal-bed methane areas of the Powder River Basin on the Bighorn Gas Gathering system, in which ONEOK Partners owns a 49 percent equity interest, ONEOK Partners tested its investment for impairment at December 31, 2013. The estimated fair value exceeded the carrying value; however, a decline of 10 percent or more in the fair value of our investment in Bighorn Gas Gathering would result in a noncash impairment charge. ONEOK Partners was not able to reasonably estimate a range of potential future impairment charges, as many of the assumptions that would be used in its estimate of fair value are dependent upon events beyond ONEOK Partners’ control. The carrying amount of ONEOK Partners’ investment at December 31, 2013, was $87.8 million, which includes $53.4 million in equity method goodwill.

2012 vs. 2011 - Revenues and cost of sales decreased for 2012 due to lower natural gas and NGL product prices and narrower NGL product price differentials, offset partially by higher natural gas and NGL sales volumes from the ONEOK Partners segment’s completed capital projects. The increase in natural gas supply resulting from development of nonconventional resource areas in North America and a warmer than normal winter have caused lower natural gas prices and narrower natural gas location and seasonal price differentials in the markets it serves. NGL prices, particularly ethane and propane, also decreased in 2012 due primarily to increased NGL production growth from the development of NGL-rich resource areas. Propane prices also were affected by a warmer than normal winter. During the second half of 2012, NGL location price differentials also narrowed due to the strong production growth, increased demand in the Mid-Continent region and increased capacity available on pipelines that connect the Mid-Continent and Gulf Coast market centers.

The price differential between the typically higher valued NGL products and the value of natural gas, particularly the price differential of ethane and natural gas may influence the volume of NGLs recovered from natural gas processing plants.  When economic conditions warrant, natural gas processors may elect not to recover the ethane component of the natural gas stream, also known as ethane rejection, and instead leave the ethane component in the residue natural gas stream sold at the tailgate of natural gas processing plants.  Price differentials between ethane and natural gas resulted in periods of ethane rejection in the Mid-Continent and Rocky Mountain regions during 2012. Ethane rejection did not have a material impact on ONEOK Partners’ financial results in 2012. We expect lower natural gas liquids volumes in ONEOK Partners’ natural gas liquids business as a result of widespread and prolonged ethane rejection in 2013 that is expected to have a significant impact on our financial results. We do not expect prolonged ethane rejection to continue in 2014.

Net margin increased primarily as a result of the following:
an increase of $131.5 million due to volume growth in the Williston Basin from ONEOK Partners’ new Garden Creek and Stateline I natural gas processing plants and increased drilling activity resulting in higher natural gas volumes gathered, compressed, processed, transported and sold, and higher fees in ONEOK Partners’ natural gas gathering and processing business;
an increase of $101.5 million related to higher NGL volumes gathered and fractionated across ONEOK Partners’ systems related to completion of certain growth projects and contract renegotiations for higher fees associated with ONEOK Partners’ NGL exchange services activities; and

51


an increase of $13.1 million due to higher natural gas liquids storage margins as a result of contract renegotiations at higher fees in ONEOK Partners’ natural gas liquids business; offset partially by
a decrease of $91.2 million in optimization and marketing margins in ONEOK Partners’ natural gas liquids business, which resulted from a $94.6 million decrease due to narrower NGL location price differentials and reduced transportation capacity available for optimization activities, as an increasing portion of its transportation capacity between the Conway, Kansas, and Mont Belvieu, Texas, NGL market centers was utilized by its exchange services activities to produce fee-based earnings. This decrease was offset partially by a $3.5 million increase in ONEOK Partners’ marketing activities that benefited from higher natural gas liquids truck and rail volumes;
a decrease of $38.1 million due primarily to higher compression costs and less favorable contract terms associated with volume growth in the Williston Basin in ONEOK Partners’ natural gas gathering and processing business;
a decrease of $31.4 million due to lower net realized natural gas and NGL prices, particularly ethane and propane, in ONEOK Partners’ natural gas gathering and processing business; and
a decrease of $5.9 million due to lower natural gas volumes gathered in the Powder River Basin as a result of continued declines in coal-bed methane production.

Operating costs increased for 2012, compared with 2011, as a result of the growth of ONEOK Partners operations and reflect the following:
an increase of $27.3 million from higher materials and supplies, and outside services expenses, including costs associated with scheduled maintenance at ONEOK Partners’ existing facilities, and higher ad valorem taxes; offset partially by
a decrease of $3.7 million due primarily to $9.0 million decrease of labor and employee-related costs associated with incentive and benefit plans, offset partially by a $5.3 million increase in other labor and employee-related costs due to the growth of operations in its natural gas gathering and processing and natural gas liquids businesses.

Depreciation and amortization increased due primarily to the higher depreciation expense associated with ONEOK Partners’ completed capital projects, which includes the completion of its Garden Creek and Stateline I natural gas processing plants, well connections and infrastructure projects supporting the volume growth in the Williston Basin.

Equity earnings from ONEOK Partners’ investments decreased due primarily to increased maintenance expenses at Northern Border Pipeline.

Capital expenditures increased for 2012, compared with 2011, due primarily to the growth projects in ONEOK Partners’ natural gas liquids business, offset partially by timing of expenditures on growth projects in ONEOK Partners’ natural gas gathering and processing business.

Previously, ONEOK Partners had a Processing and Services Agreement with us and OBPI, under which we contracted for all of OBPI’s rights, including all of the capacity of the Bushton Plant, reimbursing OBPI for all costs associated with the operation and maintenance of the Bushton Plant and its obligations under equipment leases covering portions of the Bushton Plant. On June 30, 2011, through a series of transactions, we sold OBPI to ONEOK Partners, and OBPI closed the purchase option and terminated the equipment leases.  The total amount paid by ONEOK Partners to complete the transactions was approximately $94.2 million, which included the reimbursement to us of obligations related to the Processing and Services Agreement.


52


Selected Operating Information - The following table sets forth selected operating information for our ONEOK Partners segment for the periods indicated:
Operating Information
 
2013
 
2012
 
2011
Natural gas gathering and processing business (a)
 
 
 
 
 
 
Natural gas gathered (BBtu/d)
 
1,347

 
1,119

 
1,030

Natural gas processed (BBtu/d) (b)
 
1,094

 
866

 
713

NGL sales (MBbl/d)
 
79

 
61

 
48

Residue gas sales (BBtu/d)
 
497

 
397

 
317

Realized composite NGL net sales price ($/gallon) (c)
 
$
0.87

 
$
1.06

 
$
1.08

Realized condensate net sales price ($/Bbl) (c)
 
$
86.00

 
$
88.22

 
$
82.56

Realized residue gas net sales price ($/MMBtu) (c)
 
$
3.53

 
$
3.87

 
$
5.47

Natural gas liquids business
 
 

 
 

 
 

NGL sales (MBbl/d)
 
657

 
572

 
497

NGLs fractionated (MBbl/d) (d)
 
535

 
574

 
537

NGLs transported-gathering lines (MBbl/d) (a)
 
547

 
520

 
436

NGLs transported-distribution lines (MBbl/d) (a)
 
435

 
491

 
473

Average Conway-to-Mont Belvieu OPIS price differential -
ethane in ethane/propane mix ($/gallon)
 
$
0.04

 
$
0.17

 
$
0.28

Natural gas pipelines business (a)
 
 

 
 

 
 

Natural gas transportation capacity contracted (MDth/d)
 
5,524

 
5,366

 
5,373

Transportation capacity subscribed
 
90
%
 
89
%
 
89
%
Average natural gas price
 
 

 
 

 
 

Mid-Continent region ($/MMBtu)
 
$
3.61

 
$
2.64

 
$
3.88

(a) - Includes volumes for consolidated entities only.
(b) - Includes volumes processed at company-owned and third-party facilities.
(c) - Presented net of the impact of hedging activities on ONEOK Partners’ equity volumes.
(d) - Includes volumes fractionated from company-owned and third-party facilities.

2013 vs. 2012 - Natural gas gathered, natural gas processed, NGLs sold and residue gas sold increased for 2013 compared with 2012 due to increased well connections and completion of growth projects, offset partially by continued declines in coal-bed methane production in the Powder River Basin in Wyoming and reduced drilling activity and natural production declines in Kansas.

ONEOK Partners’ Garden Creek, Stateline I and Stateline II natural gas processing plants have the capability to recover ethane when economic conditions warrant but did not do so during 2013. As a result, ONEOK Partners’ equity NGL volumes are weighted more toward propane, iso-butane, normal butane and natural gasoline and are expected to remain so until ethane recovery resumes.

NGLs transported on gathering lines increased due primarily to increased volumes from the Williston Basin made available by ONEOK Partners’ completed Bakken NGL Pipeline, and increased volumes in the Mid-Continent region and Texas made available through its Cana-Woodford Shale and Granite Wash projects, offset partially by decreases in NGL volumes gathered as a result of ethane rejection.

NGLs fractionated and NGLs transported on distribution lines decreased due primarily to decreased volumes as a result of ethane rejection during 2013, offset partially by higher volumes from the Williston Basin made available by ONEOK Partners’ completed Bakken NGL Pipeline.

In November 2012, the FERC initiated a review of Viking Gas Transmission’s rates pursuant to Section 5 of the Natural Gas Act. The parties reached agreement on the terms of a settlement that provides for a 2 percent reduction in transportation rates.  The settlement was approved by the FERC in December 2013, and the revised rates became effective January 1, 2014.

2012 vs. 2011 - Natural gas gathered volumes increased in 2012, compared with 2011, due to increased drilling activity in the Williston Basin and western Oklahoma, completion of additional natural gas gathering lines and compression to support ONEOK Partners’ new Garden Creek and Stateline I natural gas processing plants, offset partially by continued declines in coal-bed methane production in the Powder River Basin in Wyoming.


53


ONEOK Partners’ Garden Creek, Stateline I and Stateline II natural gas processing plants have the capability to recover ethane when economic conditions warrant but did not recover ethane during 2012. As a result, the 2012 equity NGL volumes and realized composite NGL net sales price associated with its natural gas gathering and processing business were weighted more toward the relatively higher priced propane, iso-butane, normal butane and natural gasoline compared with 2011.  This has the effect of producing a higher NGL composite barrel realized price, while most individual NGL products prices are substantially lower in 2012 compared with 2011.

ONEOK Partners’ operating information above does not include its 50 percent interest in Northern Border Pipeline. Substantially all of Northern Border Pipeline’s long-haul transportation capacity has been contracted through June 2015. In September 2012, Northern Border Pipeline filed with the FERC a settlement with its customers to modify its transportation rates. In January 2013, the settlement was approved and the new rates became effective January 1, 2013.

NGLs gathered and fractionated increased due primarily to increased throughput from existing connections in Texas and the Mid-Continent and Rocky Mountain regions, and new supply connections in the Mid-Continent and Rocky Mountain regions. Increased NGL gathering capacity in the Mid-Continent region and Texas was made available through ONEOK Partners’ Cana-Woodford Shale and Granite Wash projects, which were placed in service in April 2012. Increased Gulf Coast NGL fractionation capacity was made available by the 60 Mbl/d fractionation services agreement with Targa Resources Partners that began in the second quarter 2011.

NGLs transported on distribution lines increased due primarily to the Sterling I pipeline expansion and higher volumes transported on ONEOK Partners’ natural gas liquids distribution pipelines between its Mid-Continent facilities to optimize the delivery of supply.

Natural Gas Distribution

Separation of Natural Gas Distribution Business - On January 31, 2014, we completed the separation of our natural gas distribution business into a standalone publicly traded company, ONE Gas. ONE Gas consists of ONEOK’s former Natural Gas Distribution segment that included Kansas Gas Service, Oklahoma Natural Gas and Texas Gas Service. The Natural Gas Distribution segment will be classified as discontinued operations in the first quarter 2014. See additional discussion in Note U of the Notes to the Consolidated Financial Statements.

Retail Marketing Sale - On February 1, 2012, we sold ONEOK Energy Marketing Company, our retail natural gas marketing business, to Constellation Energy Group, Inc. for $22.5 million plus working capital.  We received net proceeds of approximately $32.9 million and recognized an after-tax gain on the sale of approximately $13.5 million.

Selected Financial Results - The following table sets forth certain selected financial results for the continuing operations of our former Natural Gas Distribution segment for the periods indicated:
 
 
 
 
 
 
Variances
 
Variances
 
 
Years Ended December 31,
 
2013 vs. 2012
 
2012 vs. 2011
Financial Results
 
2013
 
2012
 
2011
 
Increase (Decrease)
 
Increase (Decrease)
 
 
(Millions of dollars)
Gas sales
 
$
1,558.5

 
$
1,252.0

 
$
1,492.5

 
$
306.5

 
24
 %
 
$
(240.5
)
 
(16
)%
Transportation revenues
 
98.7

 
88.8

 
90.9

 
9.9

 
11
 %
 
(2.1
)
 
(2
)%
Cost of gas
 
876.9

 
620.2

 
869.5

 
256.7

 
41
 %
 
(249.3
)
 
(29
)%
Net margin, excluding other revenues
 
780.3

 
720.6

 
713.9

 
59.7

 
8
 %
 
6.7

 
1
 %
Other revenues
 
32.7

 
35.8

 
37.9

 
(3.1
)
 
(9
)%
 
(2.1
)
 
(6
)%
Net margin
 
813.0

 
756.4

 
751.8

 
56.6

 
7
 %