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OKS > SEC Filings for OKS > Form 10-Q on 6-Nov-2013All Recent SEC Filings

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Quarterly Report


The following discussion and analysis should be read in conjunction with our unaudited consolidated financial statements and the Notes to Consolidated Financial Statements in this Quarterly Report, as well as our Annual Report.


Market Conditions - Natural gas and natural gas liquids supply continues to increase from drilling activities in crude oil and NGL-rich resource areas. These increased drilling activities have resulted in generally lower NGL prices as well as minimal price volatility and narrower location and seasonal price differentials for natural gas and NGLs in the markets we serve. The price differential between the typically higher valued NGL products and the value of natural gas, particularly the price differential between ethane and propane to natural gas, has influenced the volume of ethane natural gas processing plants make available to be gathered in our Natural Gas Liquids segment. 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 our natural gas processing plants and some of our customers' natural gas processing plants connected to our natural gas liquids gathering system in the Mid-Continent and Rocky Mountain regions during the first nine months of 2013, which reduced natural gas liquids volumes gathered and fractionated in our Natural Gas Liquids segment and our results of operations.

We expect ethane rejection to continue through 2015, although at volume levels below those experienced during the first nine months of 2013. We expect ethane rejection will persist through 2014 at natural gas processing plants, including our own plants, connected to our NGL system in the Mid-Continent and Rocky Mountain regions; and plants located in the Rocky Mountain region, particularly the Williston Basin, will continue to reject ethane through much of 2015. Ethane rejection is expected to have a significant impact on our financial results over this period. However, our integrated NGL assets enable us to mitigate partially the impact of ethane rejection through minimum volume agreements and our ability to utilize the transportation capacity made available due to ethane rejection to capture additional NGL location price differentials in our optimization activities. In addition, new NGL supply commitments are expected to provide incremental volumes in 2014 and 2015 to further mitigate the impact of ethane rejection on our Natural Gas Liquids segment. See additional discussion in the "Financial Results and Operating Information" section in our Natural Gas Liquids segment.

North American natural gas production continues to increase at a faster rate than demand, primarily as a result of increased production from nonconventional resource areas such as shales. Producers currently receive higher market prices on a heating-value basis for crude oil and composite NGLs compared with natural gas. As a result, many producers continue to focus their drilling activity in shale areas that produce crude oil and NGL-rich natural gas rather than in areas with dry natural gas production. We expect continued demand for midstream infrastructure development, driven by producers who need to connect emerging production with end-use markets where current infrastructure is insufficient or nonexistent.

Sage Creek Acquisition - On September 30, 2013, we completed the acquisition of a business comprised of 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, subject to customary purchase price adjustments. 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. We plan 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 our 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.

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 we have operations. We expect 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 generally from the petrochemical industry, we are investing approximately $5.3 billion to $5.6 billion in new capital projects from 2010 through 2016 to meet the needs of natural gas producers and processors in these regions, as well as enhancing our natural gas liquids fractionation, distribution and storage infrastructure in the Gulf Coast region. The execution of these capital investments aligns with our focus to grow fee-based

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earnings. Our acreage dedications and supply commitments from producers and natural gas processors in regions associated with our growth projects are expected to provide incremental and long-term fee-based earnings and cash flows.

See additional discussion of our other growth projects in the "Financial Results and Operating Information" section in our Natural Gas Gathering and Processing and Natural Gas Liquids segments.

Cash Distributions - In October 2013, our general partner declared a cash distribution of $0.725 per unit ($2.90 per unit on an annualized basis) for the third quarter of 2013, an increase of 0.5 cents from the previous quarter, which will be paid on November 14, 2013, to unitholders of record as of the close of business on November 4, 2013.

Transactions with Affiliates - We have transactions with our affiliate ONEOK Energy Services Company, a subsidiary of ONEOK. Our Natural Gas Gathering and Processing segment sells natural gas to ONEOK Energy Services Company, and our Natural Gas Pipelines segment provides transportation and storage services to ONEOK Energy Services Company. Additionally, our Natural Gas Gathering and Processing and Natural Gas Liquids segments purchase a portion of the natural gas used in their operations from ONEOK Energy Services Company. All of our Natural Gas Gathering and Processing segment's commodity derivative financial contracts are with ONEOK Energy Services Company, and it enters into similar commodity derivative financial contracts with third parties at our direction and on our behalf. In June 2013, ONEOK announced an accelerated wind down of ONEOK Energy Services Company operations that is expected to be substantially completed by April 2014. We expect to continue providing our customers midstream services, including marketing natural gas, NGLs and condensate as a service for third parties or other ONEOK affiliates. We expect to enter into future commodity derivative financial contracts with unaffiliated third parties or ONEOK affiliates after the wind down is completed.

On July 25, 2013, ONEOK announced that its Board of Directors unanimously authorized management to pursue a plan to separate its natural gas distribution business into a standalone publicly traded company, to be named ONE Gas, Inc. Upon completion of the transaction, ONEOK and its subsidiaries would continue to be our sole general partner and own limited partners units, which together at September 30, 2013, represented a 41.3 percent interest in us. We do not expect the proposed ONEOK separation to impact us.

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