ONEOK, Inc. 2018 Form 10-K Summary
Business context and reporting period
ONEOK is a U.S. midstream energy company operating three reportable segments: Natural Gas Gathering and Processing, Natural Gas Liquids, and Natural Gas Pipelines. The filing covers the fiscal year ended December 31, 2018, with quarterly data for the fourth quarter. ONEOK completed the acquisition of the remaining publicly held interests in ONEOK Partners on June 30, 2017; therefore, 2018 comparisons include a full year of consolidated ownership, while 2017 includes only six months after the merger.
Approximately 90% of consolidated earnings were fee-based in 2018, although volumes, commodity prices, NGL differentials, drilling activity and ethane rejection remain important drivers.
Key financial metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Revenue | $12.593 billion | $12.174 billion | 3% increase |
| Operating income | $1.836 billion | $1.392 billion | 32% increase |
| Net income | $1.155 billion | $593.5 million | 95% increase |
| Net income attributable to ONEOK | $1.152 billion | $387.8 million | 197% increase |
| Diluted EPS | $2.78 | $1.29 | 116% increase |
| Adjusted EBITDA | $2.448 billion | $1.987 billion | 23% increase |
| Cash flow from operations | $2.187 billion | $1.315 billion | 66% increase |
| Capital expenditures | $2.142 billion | $512.4 million | Significant increase |
| Long-term debt, including current maturities | $9.381 billion | $8.524 billion | 10% increase |
| Dividends per common share | $3.245 | $2.72 | 19% increase |
Approximate 2018 margins were 14.6% for operating income, 9.2% for net income and 19.4% for adjusted EBITDA. The filing does not present a consolidated gross margin in a directly comparable form because commodity sales and related costs are substantial.
Fourth-quarter 2018 revenue was $3.137 billion, net income was $292.9 million and diluted EPS was $0.70. Fourth-quarter 2017 revenue was $3.792 billion, net income was $64.8 million and diluted EPS was $0.16; the 2017 quarter included a $141.3 million one-time noncash tax charge.
Segment performance
- Natural Gas Gathering and Processing: Adjusted EBITDA increased 22% to $631.6 million. Natural gas gathered increased to 2,546 BBtu/d from 2,211 BBtu/d, and processed volumes increased to 2,382 BBtu/d from 2,056 BBtu/d.
- Natural Gas Liquids: Adjusted EBITDA increased 25% to $1.441 billion. Raw feed throughput increased to 1,010 MBbl/d from 895 MBbl/d, while NGLs fractionated increased to 715 MBbl/d from 621 MBbl/d. Results benefited from wider Conway-to-Mont Belvieu differentials for most of the year.
- Natural Gas Pipelines: Adjusted EBITDA increased 8% to $366.3 million. Transportation capacity contracted increased to 6,846 MDth/d, and capacity subscribed rose to 96% from 94%.
Material changes versus the prior comparable period
- Operating income benefited from $342.9 million of natural gas and NGL volume growth, $150.4 million of higher NGL optimization and marketing earnings, and $36.4 million of higher transportation services earnings.
- Operating costs increased $84.3 million, primarily from employee-related costs, materials, outside services and maintenance. Depreciation and amortization increased $22.3 million as additional projects entered service.
- 2018 did not include the $141.3 million Tax Cuts and Jobs Act revaluation charge, the $20.0 million noncash Series E Preferred Stock contribution expense or the $30.0 million of merger-related operating costs recorded in 2017.
- ONEOK adopted ASC Topic 606 in 2018. Certain contractual fees previously reported as services revenue were reclassified as reductions of commodity purchase costs. Management states that the effect on operating income, net income and adjusted EBITDA was immaterial, but reported revenue and cost-of-sales amounts are not fully comparable with 2017.
- Net property, plant and equipment increased to $14.767 billion from $12.698 billion, reflecting substantial growth investment.
Cash flow, debt and liquidity
- Operating cash flow was $2.187 billion, exceeding cash dividends paid by $866.1 million. Investing cash outflow was $2.115 billion, largely due to growth capital expenditures.
- Cash and cash equivalents were $12.0 million at year-end. Working capital was negative $709.8 million, primarily because of current debt maturities; management does not expect the deficit to impair operations or cash flow.
- Total indebtedness was approximately $9.4 billion. ONEOK had $2.5 billion available under its revolving credit agreement and $950 million available under its $1.5 billion term loan agreement at December 31, 2018.
- ONEOK issued $1.25 billion of senior notes in July 2018 and borrowed $550 million under a new $1.5 billion term loan. It also issued 21.9 million common shares in January 2018 for net proceeds of approximately $1.2 billion.
- Investment-grade ratings were maintained: Moody’s Baa3/Prime-3 and S&P BBB/A-2, each with a stable outlook. The debt-to-adjusted-EBITDA covenant ratio was 3.5-to-1 at year-end.
- The company expected to repay $500 million of 8.625% senior notes due March 2019 using cash and/or borrowings.
Guidance, outlook, risks and unusual items
- Management projected 2019 capital expenditures of $2.660 billion to $3.900 billion, including $2.500 billion to $3.700 billion of growth capital and $160 million to $200 million of maintenance capital.
- Management expected supply volumes to remain broadly resilient despite lower fourth-quarter 2018 commodity prices and anticipated volatility in 2019.
- Management expected NGL differentials to remain wider than historical norms through completion of major infrastructure projects, including Arbuckle II, expected in early 2020.
- The announced approximately $6 billion growth program had incurred approximately $2 billion of spending by year-end. Major projects included Demicks Lake processing plants, Elk Creek, Arbuckle II, West Texas LPG expansions and the MB-4 and MB-5 fractionators.
- ONEOK acquired the remaining 20% interest in West Texas LPG for $195 million in July 2018 and became its sole owner.
- Key risks include producer drilling declines, commodity and NGL differential volatility, excess capacity, construction delays or cost overruns, financing and interest-rate risk, counterparty credit risk, regulatory rate changes, pipeline integrity, environmental liabilities, climate-related regulation, severe weather and cybersecurity events.
- Gas Index Pricing Litigation remains pending following an appellate reversal and remand in the Sinclair case; management expects any future charges to be immaterial. Other litigation losses were also considered not material.
- The independent auditor issued an unqualified opinion and concluded that internal control over financial reporting was effective as of December 31, 2018.
Important facts for investors to verify
- Reconcile 2018 revenue and cost-of-sales trends for the ASC Topic 606 reclassification before comparing margins with 2017.
- Assess whether projected 2019 capital spending, project completion dates and contracted volumes support expected EBITDA and dividend growth.
- Monitor leverage, debt maturities, interest rates and continued access to the revolving facility and term loan.
- Evaluate the sensitivity of earnings to NGL price differentials, commodity prices, ethane rejection and producer activity.
- Confirm the timing and cost of Elk Creek, Arbuckle II, Demicks Lake, West Texas LPG and MB-4/MB-5 projects.
- Review regulatory, environmental, pipeline-safety and Gas Index Pricing Litigation developments, including any potential change in management’s assessment of materiality.