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OKS > SEC Filings for OKS > Form 10-Q on 6-Aug-2014All 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 - Domestic supplies of natural gas, natural gas liquids and crude oil continue to increase from drilling activities in crude oil and NGL-rich resource areas. North American natural gas production continues to increase at a faster rate than demand, primarily as a result of increased production from shale and other nonconventional resource areas. We expect continued demand for midstream infrastructure development to be driven by producers who need to connect emerging natural gas and natural gas liquids production with end-use markets where current infrastructure is insufficient or nonexistent.

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. Natural gas prices were favorable to ethane prices on a Btu basis, which 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 2013 and the first six months of 2014, which reduced natural gas liquids volumes gathered and fractionated in our Natural Gas Liquids segment and reduced our results of operations.

We expect ethane rejection will persist at least through much of 2016, after which new world-scale ethylene production capacity is forecasted 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 our financial results over this period. However, new NGL supply commitments are expected to increase volumes in 2014 through 2016 to mitigate partially the impact of ethane rejection on our Natural Gas Liquids segment. In addition, our Natural Gas Liquids segment's integrated assets enable it to mitigate further the impact of ethane rejection through minimum volume commitments and our ability to utilize the transportation capacity made available due to ethane rejection to capture additional NGL location price differentials when they exist in our optimization activities. Beginning in the fourth quarter 2013, we experienced high propane demand for crop drying and increased heating demand due to much colder than normal weather that continued into the first quarter 2014. In response to this increased demand, propane prices increased significantly at the Mid-Continent market center at Conway, Kansas, compared with the Gulf Coast market center at Mont Belvieu, Texas, for the three months ended March 31, 2014, compared with the same period in 2013. The price of propane in the Mid-Continent market and the wider location price differentials between the Mid-Continent and Gulf Coast market centers peaked in late January 2014 and returned to historical levels by the end of February 2014 as supply and demand balanced. See additional discussion in the "Financial Results and Operating Information" section.

We also expect narrow NGL price differentials, with periods of volatility for certain NGL products, between the Conway, Kansas, and Mont Belvieu, Texas, market centers to persist as new fractionators and pipelines from various NGL-rich shale areas throughout the country, including our growth projects discussed below, continue to alleviate constraints affecting NGL prices and location price differentials between the two market centers.

New natural gas liquids pipeline projects constructed by third parties are expected to bring incremental NGL supply from the Rocky Mountain, Marcellus and Utica regions to the Mont Belvieu, Texas, 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. Our Natural Gas Liquids segment's capital projects are backed by fee-based supply commitments that we expect will fill much of our optimization capacity used historically to capture NGL location price differentials between the Mid-Continent and Gulf Coast market centers.

Growth Projects - Crude oil and natural gas producers continue to drill aggressively for crude oil and NGL-rich natural gas 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 and other formations in the Powder River Basin and in the Cana-Woodford Shale, Woodford Shale, Granite Wash, Mississippian Lime and SCOOP 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, we are investing approximately $7.0 billion to $7.5 billion in new capital projects and acquisitions from 2010 through 2016 to meet the needs of natural gas producers and processors in these regions, as well as enhance our natural gas liquids fractionation, distribution and storage infrastructure in the Gulf Coast region. The execution of these capital investments aligns with our strategy to grow fee-based earnings. Our acreage dedications and supply

Table of Contents

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

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 July 2014, our general partner declared a cash distribution of $0.76 per unit ($3.04 per unit on an annualized basis) for the second quarter 2014, an increase of 1.5 cents from the previous quarter, which will be paid on August 14, 2014, to unitholders of record as of the close of business on August 4, 2014.

Transactions with Affiliates - For the three months ended March 31, 2014 and the three and six months ended June 30, 2013, we had transactions with our affiliate ONEOK Energy Services Company, a subsidiary of ONEOK. Our Natural Gas Gathering and Processing segment sold natural gas to ONEOK Energy Services Company, and our Natural Gas Pipelines segment provided transportation and storage services to ONEOK Energy Services Company. Additionally, our Natural Gas Gathering and Processing and Natural Gas Liquids segments purchased a portion of the natural gas used in their operations from ONEOK Energy Services Company. Prior to March 31, 2014, all of our Natural Gas Gathering and Processing segment's commodity derivative financial contracts were with ONEOK Energy Services Company, and it entered into similar commodity derivative financial contracts with third parties at our direction and on our behalf. On March 31, 2014, ONEOK completed the accelerated wind down of ONEOK Energy Services Company. In the first quarter 2014, outstanding commodity derivative positions with third parties entered into by ONEOK Energy Services Company on our behalf were transferred to us. Beginning in the second quarter 2014, we enter into all commodity derivative financial contracts directly with unaffiliated third parties.

On January 31, 2014, ONEOK completed the separation of its former natural gas distribution business into ONE Gas. We continue to enter into commodity sales and transportation and storage services transactions with ONE Gas after the separation, and these transactions are reflected as unaffiliated, third-party transactions beginning in February 2014.

ONEOK and its subsidiaries continue to be our sole general partner and own limited partners units, which together at June 30, 2014, represented a 38.5 percent interest in us.

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