UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2022.

OR

☐ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from __________ to __________.

Commission file number   001-13643

ONEOK, Inc.

(Exact name of registrant as specified in its charter)

Oklahoma	73-1520922
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

100 West Fifth Street,	Tulsa,	OK	74103
(Address of principal executive offices)			(Zip Code)

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

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common stock, par value of $0.01	OKE	New York Stock Exchange

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒  No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer ☒  Accelerated filer ☐  Non-accelerated filer ☐  Smaller reporting company ☐   Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

On August 1, 2022, the Company had 446,862,227 shares of common stock outstanding.

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ONEOK, Inc.

TABLE OF CONTENTS

Part I.	Financial Information	Page No.
Item 1.	Financial Statements (Unaudited)	6
	Consolidated Statements of Income - Three and Six Months Ended June 30, 2022 and 2021	6
	Consolidated Statements of Comprehensive Income - Three and Six Months Ended June 30, 2022 and 2021	7
	Consolidated Balance Sheets - June 30, 2022, and December 31, 2021	8
	Consolidated Statements of Cash Flows - Six Months Ended June 30, 2022 and 2021	11
	Consolidated Statements of Changes in Equity - Three and Six Months Ended June 30, 2022 and 2021	12
	Notes to Consolidated Financial Statements	14
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	46
Item 4.	Controls and Procedures	48
Part II.	Other Information	48
Item 1.	Legal Proceedings	48
Item 1A.	Risk Factors	48
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	49
Item 3.	Defaults Upon Senior Securities	49
Item 4.	Mine Safety Disclosures	49
Item 5.	Other Information	49
Item 6.	Exhibits	49
Signature		51

As used in this Quarterly Report, references to “we,” “our” or “us” refer to ONEOK, Inc., an Oklahoma corporation, and its predecessors and subsidiaries, unless the context indicates otherwise.

The statements in this Quarterly Report that are not historical information, including statements concerning plans and objectives of management for future operations, economic performance or related assumptions, are forward-looking statements. Forward-looking statements may include words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “forecast,” “goal,” “target,” “guidance,” “intend,” “may,” “might,” “outlook,” “plan,” “potential,” “project,” “scheduled,” “should,” “will,” “would” and other words and terms of similar meaning. Although we believe that our expectations regarding future events are based on reasonable assumptions, we can give no assurance that such expectations or assumptions will be achieved. Important factors that could cause actual results to differ materially from those in the forward-looking statements are described under Part I, Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations “Forward-Looking Statements,” and Part II, Item 1A, “Risk Factors,” in this Quarterly Report and under Part I, Item 1A, “Risk Factors,” in our Annual Report.

INFORMATION AVAILABLE ON OUR WEBSITE

We make available, free of charge, on our website (www.oneok.com) copies of our Annual Reports, Quarterly Reports, Current Reports on Form 8-K, amendments to those reports filed or furnished to the SEC pursuant to Section 13(a) or 15(d) of the Exchange Act and reports of holdings of our securities filed by our officers and directors under Section 16 of the Exchange Act as soon as reasonably practicable after filing such material electronically or otherwise furnishing it to the SEC. Copies of our Code of Business Conduct and Ethics, Corporate Governance Guidelines, Director Independence Guidelines, Corporate Sustainability Report and the written charters of our Board Committees also are available on our website, and we will provide copies of these documents upon request.

In addition to our filings with the SEC and materials posted on our website, we also use social media platforms as additional channels of distribution to reach public investors. Information contained on our website, posted on our social media accounts, and any corresponding applications, are not incorporated by reference into this report.

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GLOSSARY

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

$2.5 Billion Credit Agreement	ONEOK’s $2.5 billion revolving credit agreement, as amended and restated
AFUDC	Allowance for funds used during construction
Annual Report	Annual Report on Form 10-K for the year ended December 31, 2021
ASU	Accounting Standards Update
Bbl	Barrels, 1 barrel is equivalent to 42 United States gallons
BBtu/d	Billion British thermal units per day
Bcf	Billion cubic feet
Btu	British thermal unit
CFTC	U.S. Commodity Futures Trading Commission
Clean Air Act	Federal Clean Air Act, as amended
COVID-19	Coronavirus disease 2019, including variants thereof
DJ	Denver-Julesburg
EBITDA	Earnings before interest expense, income taxes, depreciation and amortization
EPA	United States Environmental Protection Agency
EPS	Earnings per share of common stock
ESG	Environmental, social and governance
Exchange Act	Securities Exchange Act of 1934, as amended
FERC	Federal Energy Regulatory Commission
Fitch	Fitch Ratings, Inc.
GAAP	Accounting principles generally accepted in the United States of America
Guardian Pipeline	Guardian Pipeline, L.L.C., a wholly owned subsidiary of ONEOK, Inc.
Guardian Term Loan Agreement	Guardian Pipeline’s senior unsecured three-year $120 million term loan agreement dated June 24, 2022
GHG	Greenhouse gas
Homeland Security	United States Department of Homeland Security
ICE	Intercontinental Exchange
Intermediate Partnership	ONEOK Partners Intermediate Limited Partnership, a wholly owned subsidiary of ONEOK Partners, L.P.
LIBOR	London Interbank Offered Rate
MBbl/d	Thousand barrels per day
MDth/d	Thousand dekatherms per day
MMBbl	Million barrels
MMBbl/d	Million barrels per day
MMBtu	Million British thermal units
MMcf/d	Million cubic feet per day
Moody’s	Moody’s Investors Service, Inc.
NGL(s)	Natural gas liquid(s)
NGL products	Marketable natural gas liquid purity products, such as ethane, ethane/propane mix, propane, iso-butane, normal butane and natural gasoline
Northern Border Pipeline	Northern Border Pipeline Company, a 50% owned joint venture
NYMEX	New York Mercantile Exchange
ONEOK	ONEOK, Inc.
ONEOK Partners	ONEOK Partners, L.P., a wholly owned subsidiary of ONEOK, Inc.
OPIS	Oil Price Information Service
Overland Pass Pipeline	Overland Pass Pipeline Company, LLC, a 50% owned joint venture
PHMSA	United States Department of Transportation Pipeline and Hazardous Materials Safety Administration
POP	Percent of Proceeds
Quarterly Report(s)	Quarterly Report(s) on Form 10-Q
Roadrunner	Roadrunner Gas Transmission, LLC, a 50% owned joint venture
S&P	S&P Global Ratings
SCOOP	South Central Oklahoma Oil Province, an area in the Anadarko Basin in Oklahoma
SEC	Securities and Exchange Commission
Series E Preferred Stock	Series E Non-Voting, Perpetual Preferred Stock, par value $0.01 per share

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SOFR	Secured Overnight Financing Rate
STACK	Sooner Trend Anadarko Canadian Kingfisher, an area in the Anadarko Basin in Oklahoma
Term SOFR	The forward-looking term rate based on SOFR
WTI	West Texas Intermediate
XBRL	eXtensible Business Reporting Language

5

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ONEOK, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
	Three Months Ended				Six Months Ended
	June 30,				June 30,
(Unaudited)	2022		2021		2022		2021
	(Thousands of dollars, except per share amounts)
Revenues
Commodity sales	$	5,650,803	$	3,074,773	$	10,756,014	$	5,910,882
Services	345,918		314,191		685,316		672,761
Total revenues (Note J)	5,996,721		3,388,964		11,441,330		6,583,643
Cost of sales and fuel (exclusive of items shown separately below)	4,877,999		2,366,979		9,243,947		4,488,489
Operations and maintenance	230,687		212,319		445,093		419,477
Depreciation and amortization	157,757		156,921		311,615		314,041
General taxes	46,777		41,940		96,288		86,379
Other operating (income) expense, net	(5,449)		(707)		(7,019)		(976)
Operating income	688,950		611,512		1,351,406		1,276,233
Equity in net earnings from investments (Note H)	35,630		25,720		71,970		59,040
Allowance for equity funds used during construction	594		426		965		1,238
Other income (expense), net	(9,324)		(493)		(22,846)		(5,515)
Interest expense (net of capitalized interest of $13,519, $5,443, $25,239 and $10,538, respectively)	(170,751)		(184,957)		(342,805)		(370,480)
Income before income taxes	545,099		452,208		1,058,690		960,516
Income taxes	(130,721)		(110,069)		(253,141)		(232,201)
Net income	414,378		342,139		805,549		728,315
Less: Preferred stock dividends	275		275		550		550
Net income available to common shareholders	$	414,103	$	341,864	$	804,999	$	727,765
Basic EPS (Note G)	$	0.93	$	0.77	$	1.80	$	1.63
Diluted EPS (Note G)	$	0.92	$	0.77	$	1.80	$	1.63
Average shares (thousands)
Basic	447,451		446,337		447,288		446,116
Diluted	448,182		446,903		448,293		446,894

See accompanying Notes to Consolidated Financial Statements.

6

ONEOK, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
	Three Months Ended				Six Months Ended
	June 30,				June 30,
(Unaudited)	2022		2021		2022		2021
	(Thousands of dollars)
Net income	$	414,378	$	342,139	$	805,549	$	728,315
Other comprehensive income (loss), net of tax
Change in fair value of derivatives, net of tax of $(6,639), $51,692, $14,798 and $41,835, respectively	22,226		(173,054)		(49,542)		(140,056)
Derivative amounts reclassified to net income, net of tax of $(21,036), $(10,516), $(40,760) and $(22,877), respectively	70,426		35,204		136,458		76,591
Change in retirement and other postretirement benefit plan obligations, net of tax of $(873), $(1,567), $(1,778) and $(2,654), respectively	2,922		5,247		5,952		8,885
Other comprehensive income (loss) of unconsolidated affiliates, net of tax of $(1,596), $970, $(3,503) and $(1,369), respectively	5,343		(3,244)		11,728		4,586
Total other comprehensive income (loss), net of tax	100,917		(135,847)		104,596		(49,994)
Comprehensive income	$	515,295	$	206,292	$	910,145	$	678,321

See accompanying Notes to Consolidated Financial Statements.

7

ONEOK, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
		June 30,		December 31,
(Unaudited)		2022		2021
Assets	(Thousands of dollars)
Current assets
Cash and cash equivalents		$	135,774	$	146,391
Accounts receivable, net		1,778,687		1,441,786
Materials and supplies		154,024		153,019
NGLs and natural gas in storage		619,880		427,880
Commodity imbalances		49,251		39,609
Other current assets		288,883		165,689
Total current assets		3,026,499		2,374,374
Property, plant and equipment
Property, plant and equipment		24,394,512		23,820,539
Accumulated depreciation and amortization		4,793,293		4,500,665
Net property, plant and equipment		19,601,219		19,319,874
Investments and other assets
Investments in unconsolidated affiliates		801,315		797,613
Goodwill and net intangible assets		758,081		763,295
Other assets		339,690		366,457
Total investments and other assets		1,899,086		1,927,365
Total assets		$	24,526,804	$	23,621,613

8

ONEOK, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(Continued)
		June 30,		December 31,
(Unaudited)		2022		2021
Liabilities and equity	(Thousands of dollars)
Current liabilities
Current maturities of long-term debt (Note D)		$	895,814	$	895,814
Accounts payable		1,923,761		1,332,391
Commodity imbalances		345,806		309,054
Accrued interest		235,068		235,602
Operating lease liability		12,305		13,783
Other current liabilities		242,079		397,975
Total current liabilities		3,654,833		3,184,619
Long-term debt, excluding current maturities (Note D)		12,872,692		12,747,636
Deferred credits and other liabilities
Deferred income taxes		1,425,818		1,166,690
Operating lease liability		71,212		75,636
Other deferred credits		387,620		431,869
Total deferred credits and other liabilities		1,884,650		1,674,195
Commitments and contingencies (Note I)
Equity (Note E)
ONEOK shareholders’ equity:
Preferred stock, $0.01 par value: authorized and issued 20,000 shares at June 30, 2022, and December 31, 2021		—		—
Common stock, $0.01 par value: authorized 1,200,000,000 shares; issued 474,916,234 shares and outstanding 446,856,499 shares at June 30, 2022; issued 474,916,234 shares and outstanding 446,138,177 shares at December 31, 2021		4,749		4,749
Paid-in capital		7,190,457		7,213,861
Accumulated other comprehensive loss (Note F)		(366,755)		(471,351)
Retained earnings		—		—
Treasury stock, at cost: 28,059,735 shares at June 30, 2022, and 28,778,057 shares at December 31, 2021		(713,822)		(732,096)
Total equity		6,114,629		6,015,163
Total liabilities and equity		$	24,526,804	$	23,621,613

See accompanying Notes to Consolidated Financial Statements.

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10

ONEOK, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
	Six Months Ended
	June 30,
(Unaudited)	2022		2021
	(Thousands of dollars)
Operating activities
Net income	$	805,549	$	728,315
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	311,615		314,041
Equity in net earnings from investments	(71,970)		(59,040)
Distributions received from unconsolidated affiliates	71,488		58,486
Deferred income taxes	227,897		226,963
Other, net	44,584		39,837
Changes in assets and liabilities:
Accounts receivable	(339,729)		(268,541)
NGLs and natural gas in storage, net of commodity imbalances	(164,890)		(171,654)
Accounts payable	568,705		363,694
Risk-management assets and liabilities	(130,873)		(158,927)
Other assets and liabilities, net	(72,792)		4,809
Cash provided by operating activities	1,249,584		1,077,983
Investing activities
Capital expenditures (less allowance for equity funds used during construction)	(559,310)		(324,122)
Distributions received from unconsolidated affiliates in excess of cumulative earnings	13,375		11,695
Other, net	3,148		(12,138)
Cash used in investing activities	(542,787)		(324,565)
Financing activities
Dividends paid	(835,309)		(833,083)
Issuance of long-term debt	120,000		—
Repayment of long-term debt	—		(68,787)
Other, net	(2,105)		(1,667)
Cash used in financing activities	(717,414)		(903,537)
Change in cash and cash equivalents	(10,617)		(150,119)
Cash and cash equivalents at beginning of period	146,391		524,496
Cash and cash equivalents at end of period	$	135,774	$	374,377

See accompanying Notes to Consolidated Financial Statements.

11

ONEOK, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Unaudited)	Preferred Stock Issued	Common Stock Issued	Preferred Stock		Common Stock		Paid-in Capital
	(Shares)		(Thousands of dollars)
January 1, 2022	20,000	474,916,234	$	—	$	4,749	$	7,213,861
Net income	—	—	—		—		—
Other comprehensive income (Note F)	—	—	—		—		—
Preferred stock dividends - $13.75 per share (Note E)	—	—	—		—
Common stock issued	—	—	—		—		(5,325)
Common stock dividends - $0.935 per share (Note E)	—	—	—		—		(26,264)
Other, net	—	—	—		—		(5,289)
March 31, 2022	20,000	474,916,234	$	—	$	4,749	$	7,176,983
Net income	—	—	—		—		—
Other comprehensive income (Note F)	—	—	—		—		—
Preferred stock dividends - $13.75 per share (Note E)	—	—	—		—
Common stock issued	—	—	—		—		7,039
Common stock dividends - $0.935 per share (Note E)	—	—	—		—		(3,553)
Other, net	—	—	—		—		9,988
June 30, 2022	20,000	474,916,234	$	—	$	4,749	$	7,190,457

(Unaudited)	Preferred Stock Issued	Common Stock Issued	Preferred Stock		Common Stock		Paid-in Capital
	(Shares)		(Thousands of dollars)
January 1, 2021	20,000	474,916,234	$	—	$	4,749	$	7,353,396
Net income	—	—	—		—		—
Other comprehensive income	—	—	—		—		—
Preferred stock dividends - $13.75 per share	—	—	—		—		—
Common stock issued	—	—	—		—		(10,159)
Common stock dividends - $0.935 per share	—	—	—		—		(30,234)
Other, net	—	—	—		—		(7,729)
March 31, 2021	20,000	474,916,234	$	—	$	4,749	$	7,305,274
Net income	—	—	—		—		—
Other comprehensive loss	—	—	—		—		—
Preferred stock dividends - $13.75 per share	—	—	—		—		—
Common stock issued	—	—	—		—		7,115
Common stock dividends - $0.935 per share	—	—	—		—		(74,765)
Other, net	—	—	—		—		9,710
June 30, 2021	20,000	474,916,234	$	—	$	4,749	$	7,247,334

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ONEOK, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (Continued)
(Unaudited)	Accumulated Other Comprehensive Loss		Retained Earnings		Treasury Stock		Total Equity
	(Thousands of dollars)
January 1, 2022	$	(471,351)	$	—	$	(732,096)	$	6,015,163
Net income	—		391,171		—		391,171
Other comprehensive income (Note F)	3,679		—		—		3,679
Preferred stock dividends - $13.75 per share (Note E)	—		(275)		—		(275)
Common stock issued	—		—		11,730		6,405
Common stock dividends - $0.935 per share (Note E)	—		(390,896)		—		(417,160)
Other, net	—		—		—		(5,289)
March 31, 2022	$	(467,672)	$	—	$	(720,366)	$	5,993,694
Net income	—		414,378		—		414,378
Other comprehensive income (Note F)	100,917		—		—		100,917
Preferred stock dividends - $13.75 per share (Note E)	—		(275)		—		(275)
Common stock issued	—		—		6,544		13,583
Common stock dividends - $0.935 per share (Note E)	—		(414,103)		—		(417,656)
Other, net	—		—		—		9,988
June 30, 2022	$	(366,755)	$	—	$	(713,822)	$	6,114,629

(Unaudited)	Accumulated Other Comprehensive Loss		Retained Earnings		Treasury Stock		Total Equity
	(Thousands of dollars)
January 1, 2021	$	(551,449)	$	—	$	(764,298)	$	6,042,398
Net income	—		386,176		—		386,176
Other comprehensive income	85,853		—		—		85,853
Preferred stock dividends - $13.75 per share	—		(275)		—		(275)
Common stock issued	—		—		16,836		6,677
Common stock dividends - $0.935 per share	—		(385,901)		—		(416,135)
Other, net	—		—		—		(7,729)
March 31, 2021	$	(465,596)	$	—	$	(747,462)	$	6,096,965
Net income	—		342,139		—		342,139
Other comprehensive loss	(135,847)		—		—		(135,847)
Preferred stock dividends - $13.75 per share	—		(275)		—		(275)
Common stock issued	—		—		7,208		14,323
Common stock dividends - $0.935 per share	—		(341,864)		—		(416,629)
Other, net	—		—		—		9,710
June 30, 2021	$	(601,443)	$	—	$	(740,254)	$	5,910,386

See accompanying Notes to Consolidated Financial Statements.

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ONEOK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

A.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Our accompanying unaudited Consolidated Financial Statements have been prepared pursuant to the rules and regulations of the SEC. These statements have been prepared in accordance with GAAP and reflect all adjustments that, in our opinion, are necessary for a fair statement of the results for the interim periods presented. All such adjustments are of a normal recurring nature. The 2021 year-end Consolidated Balance Sheet data was derived from our audited Consolidated Financial Statements but does not include all disclosures required by GAAP. These unaudited Consolidated Financial Statements should be read in conjunction with our audited Consolidated Financial Statements in our Annual Report.

Subsequent Event - On July 9, 2022, a fire occurred at our 210 MBbl/d Medford, Oklahoma, natural gas liquids fractionation facility. All personnel are safe and accounted for with evacuations of local residents taken as a precautionary measure. While the facility is not currently operational, we are using our integrated NGL pipeline system between the Mid-Continent and Gulf Coast, along with our fractionation and storage assets and fractionation and storage arrangements with industry peers, to provide midstream services. We are working to reduce future impacts to our suppliers and customers. We are cooperating with government agencies, as applicable, and we continue our efforts to determine the cause of the event and expect the Medford facility to remain out of service for an extended period. Subject to the terms and conditions of the policies and any applicable sub-limits, we have property damage and business interruption insurance coverage with a combined per occurrence limit of $2 billion and deductibles of $5 million per occurrence for property damage and a 45-day waiting period per occurrence for business interruption coverage.

We are in the early stages of determining the full extent of property damage and developing information to support a claim for property damage and business interruption losses. We expect our insurance coverage to mitigate our financial loss, which cannot be reasonably estimated at this time. As a result of our insurance coverage, we do not currently anticipate that the Medford incident will have a material effect on our financial condition, results of operations or cash flows. However, the timing of insurance proceeds may impact our results in a given quarter or year.

Recently Issued Accounting Standards Update - Changes to GAAP are established by the Financial Accounting Standards Board (FASB) in the form of ASUs to the FASB Accounting Standards Codification. We consider the applicability and impact of all ASUs. ASUs not discussed herein or in our Annual Report were assessed and determined to be either not applicable or clarifications of ASUs previously issued. There have been no new accounting pronouncements that have become effective or have been issued that are of significance or potential significance to us.

B.    FAIR VALUE MEASUREMENTS

Determining Fair Value - For our fair value measurements, we utilize market prices, third-party pricing services, present value methods and standard option valuation models to determine the price we would receive from the sale of an asset or the transfer of a liability in an orderly transaction at the measurement date. We measure the fair value of a group of financial assets and liabilities consistent with how a market participant would price the net risk exposure at the measurement date.

Many of the contracts in our derivative portfolio are executed in liquid markets where price transparency exists. Our financial commodity derivatives are generally settled through a NYMEX or ICE clearing broker account with daily margin requirements. We validate our valuation inputs with third-party information and settlement prices from other sources, where available.

We compute the fair value of our derivative portfolio by discounting the projected future cash flows from our derivative assets and liabilities to present value using interest-rate yields to calculate present-value discount factors derived from the implied forward SOFR, LIBOR or other yield curve, as appropriate. The fair value of our forward-starting interest-rate swaps is determined using financial models that incorporate the implied forward LIBOR yield curve for the same period as the future interest-rate swap settlements. We consider current market data in evaluating counterparties’, as well as our own, nonperformance risk, net of collateral, by using counterparty-specific bond yields. Although we use our best estimates to determine the fair value of the derivative contracts we have executed, the ultimate market prices realized could differ materially from our estimates.

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Fair Value Hierarchy - At each balance sheet date, we utilize a fair value hierarchy to classify fair value amounts recognized or disclosed in our financial statements based on the observability of inputs used to estimate such fair value. The levels of the hierarchy are described below:

•Level 1 - fair value measurements are based on unadjusted quoted prices for identical securities in active markets. These balances are composed predominantly of exchange-traded derivative contracts for natural gas and crude oil.

•Level 2 - fair value measurements are based on significant observable pricing inputs, including quoted prices for similar assets and liabilities in active markets and inputs from third-party pricing services supported with corroborative evidence. These balances are composed of exchange-cleared derivatives to hedge natural gas basis and NGL price risk at certain market locations and over-the-counter interest-rate derivatives.

•Level 3 - fair value measurements are based on inputs that may include one or more unobservable inputs, including internally developed commodity price curves that incorporate market data from broker quotes and third-party pricing services. These balances are composed predominantly of exchange-cleared and over-the-counter derivatives to hedge NGL price risk at certain market locations. These commodity derivatives are generally valued using forward quotes provided by third-party pricing services that are validated with other market data. We believe any measurement uncertainty at June 30, 2022, is immaterial as our Level 3 fair value measurements are based on unadjusted pricing information from broker quotes and third-party pricing services.

Determining the appropriate classification of our fair value measurements within the fair value hierarchy requires management’s judgment regarding the degree to which market data is observable or corroborated by observable market data. We categorize derivatives based on the lowest level input that is significant to the fair value measurement in its entirety.

Recurring Fair Value Measurements - The following tables set forth our recurring fair value measurements for the periods indicated:

	June 30, 2022
	Level 1		Level 2		Level 3		Total - Gross		Netting (a)		Total - Net
	(Thousands of dollars)
Derivative assets
Commodity contracts
Financial contracts	$	14,226	$	130,446	$	19,529	$	164,201	$	(164,201)	$	—
Interest-rate contracts	—		24,223		—		24,223		—		24,223
Total derivative assets	$	14,226	$