10-Q 1 oke-20220331.htm OKE-2022.3.31-10Q oke-20220331
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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 March 31, 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

oke-20220331_g1.jpg
ONEOK, Inc.
(Exact name of registrant as specified in its charter)

Oklahoma73-1520922
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer Identification No.)
 
100 West Fifth Street,
Tulsa,OK74103
(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 classTrading Symbol(s)Name of each exchange on which registered
Common stock, par value of $0.01OKENew 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 April 25, 2022, the Company had 446,616,031 shares of common stock outstanding.




























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ONEOK, Inc.
TABLE OF CONTENTS
Page No.
 
 
 
 
 
 
 

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

The statements in this Quarterly Report that are not historical information, including statements concerning plans and objectives of management for future operations, economic performance or related assumptions, are forward-looking statements. Forward-looking statements may include words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “forecast,” “goal,” “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
AFUDCAllowance for funds used during construction
Annual ReportAnnual Report on Form 10-K for the year ended December 31, 2021
ASUAccounting Standards Update
BblBarrels, 1 barrel is equivalent to 42 United States gallons
BBtu/dBillion British thermal units per day
BcfBillion cubic feet
BtuBritish thermal unit
CFTCU.S. Commodity Futures Trading Commission
Clean Air ActFederal Clean Air Act, as amended
COVID-19Coronavirus disease 2019, including variants thereof
DJDenver-Julesburg
EBITDAEarnings before interest expense, income taxes, depreciation and amortization
EPAUnited States Environmental Protection Agency
EPSEarnings per share of common stock
ESGEnvironmental, social and governance
Exchange ActSecurities Exchange Act of 1934, as amended
FERCFederal Energy Regulatory Commission
FitchFitch Ratings, Inc.
GAAPAccounting principles generally accepted in the United States of America
GHGGreenhouse gas
Homeland SecurityUnited States Department of Homeland Security
ICEIntercontinental Exchange
Intermediate Partnership
ONEOK Partners Intermediate Limited Partnership, a wholly owned subsidiary of ONEOK Partners, L.P.
LIBORLondon Interbank Offered Rate
MBbl/dThousand barrels per day
MDth/dThousand dekatherms per day
MMBblMillion barrels
MMBbl/dMillion barrels per day
MMBtuMillion British thermal units
MMcf/dMillion cubic feet per day
Moody’sMoody’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 PipelineNorthern Border Pipeline Company, a 50% owned joint venture
NYMEXNew York Mercantile Exchange
ONEOKONEOK, Inc.
ONEOK PartnersONEOK Partners, L.P., a wholly owned subsidiary of ONEOK, Inc.
OPISOil 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
POPPercent of Proceeds
Quarterly Report(s)Quarterly Report(s) on Form 10-Q
RoadrunnerRoadrunner Gas Transmission, LLC, a 50% owned joint venture
S&PS&P Global Ratings
SECSecurities and Exchange Commission
Series E Preferred StockSeries E Non-Voting, Perpetual Preferred Stock, par value $0.01 per share
SOFRSecured Overnight Financing Rate
WTIWest Texas Intermediate
XBRLeXtensible Business Reporting Language

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PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ONEOK, Inc. and Subsidiaries  
CONSOLIDATED STATEMENTS OF INCOME  
 Three Months Ended
 March 31,
(Unaudited)
20222021
 
(Thousands of dollars, except per share amounts)
Revenues
Commodity sales$5,105,211 $2,836,109 
Services339,398 358,570 
Total revenues (Note J)5,444,609 3,194,679 
Cost of sales and fuel (exclusive of items shown separately below)4,365,948 2,121,510 
Operations and maintenance214,406 207,158 
Depreciation and amortization153,858 157,120 
General taxes49,511 44,439 
Gain on sale of assets(1,570)(269)
Operating income662,456 664,721 
Equity in net earnings from investments (Note H)36,340 33,320 
Allowance for equity funds used during construction371 812 
Other income (expense), net(13,522)(5,022)
Interest expense (net of capitalized interest of $11,720 and $5,095, respectively)
(172,054)(185,523)
Income before income taxes513,591 508,308 
Income taxes(122,420)(122,132)
Net income391,171 386,176 
Less: Preferred stock dividends275 275 
Net income available to common shareholders$390,896 $385,901 
Basic EPS (Note G)$0.87 $0.87 
Diluted EPS (Note G)$0.87 $0.86 
Average shares (thousands)
Basic447,124 445,894 
Diluted448,404 446,885 
See accompanying Notes to Consolidated Financial Statements.
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ONEOK, Inc. and Subsidiaries  
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 Three Months Ended
 March 31,
(Unaudited)
20222021
 
(Thousands of dollars)
Net income$391,171 $386,176 
Other comprehensive income (loss), net of tax
Change in fair value of derivatives, net of tax of $21,437 and $(9,857), respectively
(71,768)32,998 
Derivative amounts reclassified to net income, net of tax of $(19,724) and $(12,361), respectively
66,032 41,387 
Change in retirement and other postretirement benefit plan obligations, net of tax of $(905) and $(1,087), respectively
3,030 3,638 
Other comprehensive income of unconsolidated affiliates, net of tax of $(1,907) and $(2,339), respectively
6,385 7,830 
Total other comprehensive income, net of tax3,679 85,853 
Comprehensive income$394,850 $472,029 
See accompanying Notes to Consolidated Financial Statements.
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ONEOK, Inc. and Subsidiaries  
CONSOLIDATED BALANCE SHEETS  
March 31,December 31,
(Unaudited)
20222021
Assets
(Thousands of dollars)
Current assets  
Cash and cash equivalents$14,610 $146,391 
Accounts receivable, net1,682,459 1,441,786 
Materials and supplies148,302 153,019 
NGLs and natural gas in storage584,104 427,880 
Commodity imbalances24,606 39,609 
Other current assets187,240 165,689 
Total current assets2,641,321 2,374,374 
Property, plant and equipment
Property, plant and equipment24,073,401 23,820,539 
Accumulated depreciation and amortization4,648,169 4,500,665 
Net property, plant and equipment19,425,232 19,319,874 
Investments and other assets
Investments in unconsolidated affiliates797,391 797,613 
Goodwill and net intangible assets760,688 763,295 
Other assets368,073 366,457 
Total investments and other assets1,926,152 1,927,365 
Total assets$23,992,705 $23,621,613 

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ONEOK, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(Continued)
March 31,December 31,
(Unaudited)
20222021
Liabilities and equity
(Thousands of dollars)
Current liabilities  
Current maturities of long-term debt (Note D)$895,814 $895,814 
Short-term borrowings (Note D)78,000  
Accounts payable1,729,943 1,332,391 
Commodity imbalances403,487 309,054 
Accrued interest136,448 235,602 
Operating lease liability12,583 13,783 
Other current liabilities226,320 397,975 
Total current liabilities3,482,595 3,184,619 
Long-term debt, excluding current maturities (Note D)
12,750,485 12,747,636 
Deferred credits and other liabilities
Deferred income taxes1,278,319 1,166,690 
Operating lease liability73,529 75,636 
Other deferred credits414,083 431,869 
Total deferred credits and other liabilities1,765,931 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 March 31, 2022, and December 31, 2021
  
Common stock, $0.01 par value:
authorized 1,200,000,000 shares; issued 474,916,234 shares and outstanding
446,599,266 shares at March 31, 2022; issued 474,916,234 shares and outstanding
446,138,177 shares at December 31, 2021
4,749 4,749 
Paid-in capital7,176,983 7,213,861 
Accumulated other comprehensive loss (Note F)(467,672)(471,351)
Retained earnings  
Treasury stock, at cost: 28,316,968 shares at March 31, 2022, and 28,778,057 shares at December 31, 2021
(720,366)(732,096)
Total equity5,993,694 6,015,163 
Total liabilities and equity$23,992,705 $23,621,613 
See accompanying Notes to Consolidated Financial Statements.

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ONEOK, Inc. and Subsidiaries  
CONSOLIDATED STATEMENTS OF CASH FLOWS  
 Three Months Ended
 March 31,
(Unaudited)
20222021
 
(Thousands of dollars)
Operating activities  
Net income$391,171 $386,176 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization153,858 157,120 
Equity in net earnings from investments(36,340)(33,320)
Distributions received from unconsolidated affiliates35,699 30,862 
Deferred income taxes110,531 119,194 
Other, net24,589 11,672 
Changes in assets and liabilities: 
Accounts receivable(243,501)(85,212)
NGLs and natural gas in storage, net of commodity imbalances(46,788)(123,379)
Accounts payable385,082 251,344 
Accrued interest(99,154)(104,872)
Risk-management assets and liabilities(118,703)(19,302)
Other assets and liabilities, net(94,233)(56,966)
Cash provided by operating activities462,211 533,317 
Investing activities
 
Capital expenditures (less allowance for equity funds used during construction)(256,978)(176,734)
Distributions received from unconsolidated affiliates in excess of cumulative earnings9,795 10,191 
Other, net3,478 (4,148)
Cash used in investing activities(243,705)(170,691)
Financing activities
 
Dividends paid(417,417)(416,229)
Short-term borrowings, net78,000  
Repayment of long-term debt (56,492)
Other, net(10,870)(11,988)
Cash used in financing activities(350,287)(484,709)
Change in cash and cash equivalents(131,781)(122,083)
Cash and cash equivalents at beginning of period146,391 524,496 
Cash and cash equivalents at end of period$14,610 $402,413 
See accompanying Notes to Consolidated Financial Statements.
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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, 202220,000 474,916,234 $ $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, 202220,000 474,916,234 $ $4,749 $7,176,983 

(Unaudited)
Preferred
Stock Issued
Common
Stock Issued
Preferred
Stock
Common
Stock
Paid-in
Capital
 
(Shares)
(Thousands of dollars)
January 1, 202120,000 474,916,234 $ $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, 202120,000 474,916,234 $ $4,749 $7,305,274 

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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 

(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 income85,853   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 
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.

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.

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 March 31, 2022, is immaterial as our Level 3 fair value measurements are based on unadjusted pricing information from broker quotes and third-party pricing services.

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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:
 March 31, 2022
 Level 1Level 2Level 3Total - GrossNetting (a)Total - Net
 
(Thousands of dollars)
Derivative assets      
Commodity contracts
Financial contracts$58,373 $251,834 $6,262 $316,469 $(316,469)$ 
Interest-rate contracts 4,420  4,420  4,420 
Total derivative assets$58,373 $256,254 $6,262 $320,889 $(316,469)$4,420 
Derivative liabilities
     
Commodity contracts
Financial contracts$(171,737)$(146,152)$(196,093)$(513,982)$513,982 $ 
Interest-rate contracts (68,788) (68,788) (68,788)
Total derivative liabilities$(171,737)$(214,940)$(196,093)$(582,770)$513,982 $(68,788)
(a) - Derivative assets and liabilities are presented in our Consolidated Balance Sheet on a net basis. We net derivative assets and liabilities when a legally enforceable master-netting arrangement exists between the counterparty to a derivative contract and us. At March 31, 2022, we held no cash and posted $275.7 million of cash with various counterparties, including $197.5 million of cash collateral that is offsetting derivative net liability positions under master-netting arrangements in the table above. The remaining $78.2 million of cash collateral in excess of derivative net liability positions is included in other current assets in our Consolidated Balance Sheet.

 December 31, 2021
 Level 1Level 2Level 3Total - GrossNetting (a)Total - Net
 
(Thousands of dollars)
Derivative assets      
Commodity contracts
Financial contracts$22,019 $172,833 $9,309 $204,161 $(204,161)$ 
Total derivative assets$22,019 $172,833 $9,309 $204,161 $(204,161)$ 
Derivative liabilities
      
Commodity contracts
Financial contracts$(67,226)$(112,922)$(123,592)$(303,740)$303,740 $ 
Interest-rate contracts (145,524) (145,524) (145,524)
Total derivative liabilities$(67,226)$(258,446)$(123,592)$(449,264)$303,740 $(145,524)
(a) - Derivative assets and liabilities are presented in our Consolidated Balance Sheet on a net basis. We net derivative assets and liabilities when a legally enforceable master-netting arrangement exists between the counterparty to a derivative contract and us. At December 31, 2021, we held no cash and posted $157.0 million of cash with various counterparties, including $99.6 million of cash collateral that is offsetting derivative net liability positions under master-netting arrangements in the table above. The remaining $57.4 million of cash collateral in excess of derivative net liability positions is included in other current assets in our Consolidated Balance Sheet.

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The following table sets forth a reconciliation of our Level 3 fair value measurements for the periods indicated:
Three Months Ended
March 31,
Derivative Assets (Liabilities)20222021
 
(Thousands of dollars)
Net liabilities at beginning of period$(114,283)$(31,321)
Total changes in fair value:
Settlements included in net income (a)38,068 24,738 
New Level 3 derivatives included in other comprehensive income (b)(506)(4,612)
Unrealized change included in other comprehensive income (b)(113,110)(30,599)
Net liabilities at end of period$(189,831)$(41,794)
(a) - Included in commodity sales revenues/cost of sales and fuel in our Consolidated Statements of Income.
(b) - Included in change in fair value of derivatives in our Consolidated Statements of Comprehensive Income.

During the three months ended March 31, 2022 and 2021, there were no transfers in or out of Level 3 of the fair value hierarchy.

Other Financial Instruments - The approximate fair value of cash and cash equivalents, accounts receivable, accounts payable and short-term borrowings is equal to book value due to the short-term nature of these items. Our cash and cash equivalents are composed of bank and money market accounts and are classified as Level 1. Our short-term borrowings are classified as Level 2 since the estimated fair value of the short-term borrowings can be determined using information available in the commercial paper market. We have investments associated with our supplemental executive retirement plan and nonqualified deferred compensation plan that are carried at fair value and primarily are composed of exchange-traded mutual funds classified as Level 1.

The estimated fair value of our consolidated long-term debt, including current maturities, was $14.3 billion and $15.6 billion at March 31, 2022, and December 31, 2021, respectively. The book value of our consolidated long-term debt, including current maturities, was $13.6 billion at March 31, 2022, and December 31, 2021. The estimated fair value of the aggregate senior notes outstanding was determined using quoted market prices for similar issues with similar terms and maturities. The estimated fair value of our consolidated long-term debt is classified as Level 2.

C.    RISK-MANAGEMENT AND HEDGING ACTIVITIES USING DERIVATIVES

Risk-management Activities - We are sensitive to changes in natural gas, crude oil and NGL prices, principally as a result of contractual terms under which these commodities are processed, purchased and sold. We are also subject to the risk of interest-rate fluctuation in the normal course of business. We use physical-forward purchases and sales and financial derivatives to secure a certain price for a portion of our natural gas, condensate and NGL products; to reduce our exposure to commodity price and interest-rate fluctuations; and to achieve more predictable cash flows. We follow established policies and procedures to assess risk and approve, monitor and report our risk-management activities. We have not used these instruments for trading purposes.

Commodity price risk - Commodity price risk refers to the risk of loss in cash flows and future earnings arising from adverse changes in the price of natural gas, NGLs and condensate. We may use the following commodity derivative instruments to reduce the near-term commodity price risk associated with a portion of the forecasted sales of these commodities:
Futures contracts - Standardized contracts to purchase or sell natural gas and crude oil for future delivery or settlement under the provisions of exchange regulations;
Forward contracts - Nonstandardized commitments between two parties to purchase or sell natural gas, crude oil or NGLs for future physical delivery. These contracts are typically nontransferable and can only be canceled with the consent of both parties;
Swaps - Exchange of one or more payments based on the value of one or more commodities. These instruments transfer the financial risk associated with a future change in value between the counterparties of the transaction, without also conveying ownership interest in the asset or liability;
Options - Contractual agreements that give the holder the right, but not the obligation, to buy or sell a fixed quantity of a commodity at a fixed price within a specified period of time. Options may either be standardized and exchange-traded or customized and nonexchange-traded; and
Collars - Combination of a purchased put option and a sold call option, which places a floor and ceiling price for commodity sales being hedged.
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We may also use other instruments to mitigate commodity price risk.

In our Natural Gas Gathering and Processing segment, we are exposed to commodity price risk as a result of retaining a portion of the commodity sales proceeds associated with our fee with POP contracts. Under certain fee with POP contracts, our fees and POP percentage may increase or decrease if production volumes, delivery pressures or commodity prices change relative to specified thresholds. In certain commodity price environments, our contractual fees on these fee with POP contracts may increase or decrease, which would impact the average fee rate in our Natural Gas Gathering and Processing segment. We also are exposed to basis risk between the various production and market locations where we buy and sell commodities. As part of our hedging strategy, we use the previously described commodity derivative financial instruments and physical-forward contracts to reduce the impact of price fluctuations related to natural gas, NGLs and condensate.

In our Natural Gas Liquids segment, we are primarily exposed to commodity price risk resulting from the relative values of the various NGL products to each other, the value of NGLs in storage and the relative value of NGLs to natural gas. We are also exposed to location price differential risk as a result of the relative value of NGL purchases at one location and sales at another location, primarily related to our optimization and marketing activities. As part of our hedging strategy, we utilize physical-forward contracts and commodity derivative financial instruments to reduce the impact of price fluctuations related to NGLs.

In our Natural Gas Pipelines segment, we are primarily exposed to commodity price risk on our intrastate pipelines because they consume natural gas in operations and retain natural gas from our customers for operations or as part of our fee for services provided. When the amount consumed in operations differs from the amount provided by our customers, our pipelines must buy or sell natural gas, or store or use natural gas inventory, which can expose this segment to commodity price risk depending on the regulatory treatment for this activity. To the extent that commodity price risk in our Natural Gas Pipelines segment is not mitigated by fuel cost-recovery mechanisms, we may use physical-forward sales or purchases to reduce the impact of natural gas price fluctuations. At March 31, 2022, and December 31, 2021, there were no financial derivative instruments with respect to our natural gas pipeline operations.

Interest-rate risk - We may manage interest-rate risk through the use of fixed-rate debt, floating-rate debt and interest-rate swaps. Interest-rate swaps are agreements to exchange interest payments at some future point based on specified notional amounts.

At March 31, 2022, and December 31, 2021, we had forward-starting interest-rate swaps with notional amounts totaling $1.1 billion to hedge the variability of interest payments on a portion of our forecasted debt issuances. All of our interest-rate swaps are designated as cash flow hedges.

Accounting Treatment - Our accounting treatment of derivative instruments is consistent with that disclosed in Note A of the Notes to Consolidated Financial Statements in our Annual Report.

Fair Values of Derivative Instruments - See Note B for a discussion of the inputs associated with our fair value measurements. The following table sets forth the fair values of our derivative instruments presented on a gross basis for the periods indicated:
 March 31, 2022December 31, 2021
 Location in our
Consolidated Balance
Sheets
Assets(Liabilities)Assets(Liabilities)
Derivatives designated as hedging instruments
(Thousands of dollars)
Commodity contracts (a)
Financial contracts (b)$316,469 $(513,982)$204,161 $(303,740)
Interest-rate contractsOther current assets/liabilities4,420 (68,788) (145,524)
Total derivatives designated as hedging instruments$320,889 $(582,770)$204,161 $(449,264)
(a) - Derivative assets and liabilities are presented in our Consolidated Balance Sheets on a net basis when a legally enforceable master-netting arrangement exists between the counterparty to a derivative contract and us.
(b) - At March 31, 2022, and December 31, 2021, our derivative net liability positions under master-netting arrangements for financial contracts were fully offset by cash collateral of $197.5 million and $99.6 million, respectively.

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Notional Quantities for Derivative Instruments - The following table sets forth the notional quantities for derivative instruments held for the periods indicated:
  March 31,
2022
December 31
2021
Contract
Type
Net Purchased/Payor
(Sold/Receiver)
Derivatives designated as hedging instruments:
Cash flow hedges   
Fixed price   
- Natural gas (Bcf)
Futures(64.7)(32.3)
- Crude oil and NGLs (MMBbl)
Futures(11.3)(10.0)
Basis 
- Natural gas (Bcf)
Futures(64.6)(30.5)
Interest-rate contracts (Billions of dollars)
Swaps$1.1 $1.1 

Cash Flow Hedges - The following table sets forth the unrealized change in fair value of cash flow hedges in other comprehensive income for the periods indicated:
 Three Months Ended
March 31,
20222021
 
(Thousands of dollars)
Commodity contracts$(174,360)$(63,430)
Interest-rate contracts81,155 106,285 
Total unrealized change in fair value of cash flow hedges in other comprehensive income$(93,205)$42,855 

The following table sets forth the effect of cash flow hedges on net income for the periods indicated:
Derivatives in Cash Flow
Hedging Relationships
Location of Gain (Loss) Reclassified from
Accumulated Other Comprehensive
Loss into Net Income
Three Months Ended
March 31,
20222021
  
(Thousands of dollars)
Commodity contractsCommodity sales revenues$(210,794)$(130,518)
Cost of sales and fuel134,368 86,436 
Interest-rate contractsInterest expense(9,330)(9,666)
Total change in fair value of cash flow hedges reclassified from accumulated other comprehensive loss into net income on derivatives$(85,756)$(53,748)

Credit Risk - We monitor the creditworthiness of our counterparties and compliance with policies and limits established by our Risk Oversight and Strategy Committee. We maintain credit policies with regard to our counterparties that we believe minimize overall credit risk. These policies include an evaluation of potential counterparties’ financial condition (including credit ratings, bond yields and credit default swap rates), collateral requirements under certain circumstances and the use of standardized master-netting agreements that allow us to net the positive and negative exposures associated with a single counterparty. We use internally developed credit ratings for counterparties that do not have a credit rating.

Our financial commodity derivatives are generally settled through a NYMEX or ICE clearing broker account with daily margin requirements. However, we may enter into financial derivative instruments that contain provisions that require us to maintain an investment-grade credit rating from S&P, Fitch and/or Moody’s. If our credit ratings on our senior unsecured long-term debt were to decline below investment grade, the counterparties to the derivative instruments could request collateralization on derivative instruments in net liability positions. There were no financial derivative instruments with contingent features related to credit risk at March 31, 2022.

The counterparties to our derivative contracts typically consist of major energy companies, financial institutions and commercial and industrial end users. This concentration of counterparties may affect our overall exposure to credit risk, either positively or negatively, in that the counterparties may be affected similarly by changes in economic, regulatory or other conditions. Based on our policies, exposures, credit and other reserves, we do not anticipate a material adverse effect on our financial position or results of operations as a result of counterparty nonperformance.
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At March 31, 2022, the credit exposure from our derivative assets is with investment-grade companies in the financial services sector.

D.    DEBT

The following table sets forth our consolidated debt for the periods indicated:
March 31,
2022
December 31,
2021
 
(Thousands of dollars)
Commercial paper outstanding, bearing a weighted-average interest rate of 0.94% as of March 31, 2022
$78,000 $ 
Senior unsecured obligations:
$900,000 at 3.375% due October 2022
895,814 895,814 
$425,000 at 5.0% due September 2023
425,000 425,000 
$500,000 at 7.5% due September 2023
500,000 500,000 
$500,000 at 2.75% due September 2024
500,000 500,000 
$500,000 at 4.9% due March 2025
500,000 500,000 
$400,000 at 2.2% due September 2025
387,000 387,000 
$