Business Context and Reporting Period
ONEOK, Inc. filed this Form 10-K for the fiscal year ended December 31, 2017; the filing also provides fourth-quarter 2017 data. ONEOK is a midstream energy company operating through Natural Gas Gathering and Processing, Natural Gas Liquids, and Natural Gas Pipelines segments. Approximately 90% of consolidated earnings were fee-based in 2017.
On June 30, 2017, ONEOK completed the acquisition of the publicly held common units of ONEOK Partners, issuing 168.9 million ONEOK shares. The transaction eliminated public ownership of ONEOK Partners and materially changed ONEOK’s ownership, capital structure, cash flows and share count.
Financial Performance and Key Metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Revenue | $12.174 billion | $8.921 billion | +36% |
| Operating income | $1.381 billion | $1.286 billion | +7% |
| Net income | $593.5 million | $743.5 million | -20% |
| Net income attributable to ONEOK | $387.8 million | $352.0 million | +10% |
| Diluted EPS | $1.29 | $1.66 | Declined |
| Adjusted EBITDA | $1.987 billion | $1.850 billion | +7% |
| Cash flow from operations | $1.315 billion | $1.353 billion | -3% |
| Capital expenditures | $512.4 million | $624.6 million | -18% |
| Total debt | $9.199 billion | $9.489 billion | -3% |
Approximate 2017 margins were 11.3% for operating income, 16.3% for adjusted EBITDA and 3.2% for net income attributable to ONEOK. These are calculated from reported figures and are not company-reported GAAP margins.
- Natural Gas Gathering and Processing adjusted EBITDA was $518.5 million, up 16%, supported by higher volumes and increased average fee rates of $0.86 per MMBtu versus $0.76 in 2016.
- Natural Gas Liquids adjusted EBITDA was $1.155 billion, up 7%, driven by higher supply volumes, ethane recovery, optimization activity and equity earnings.
- Natural Gas Pipelines adjusted EBITDA was $339.8 million, up 9%, primarily from increased firm transportation capacity and higher Roadrunner equity earnings.
- Natural gas gathered and processed increased to 2,211 BBtu/d and 2,056 BBtu/d, respectively. NGLs transported on gathering lines increased to 812 MBbl/d and NGLs fractionated increased to 621 MBbl/d.
- Year-end cash was $37.2 million. Working capital was negative $0.9 billion, primarily because of current debt maturities and short-term borrowings.
- At December 31, 2017, ONEOK had $1.9 billion of available borrowing capacity under its $2.5 billion revolving credit agreement and was in compliance with its covenants. Its debt-to-adjusted-EBITDA covenant ratio was 4.5 to 1.
- Long-term debt ratings were investment grade: Baa3 with a stable outlook from Moody’s and BBB with a stable outlook from S&P.
Fourth-Quarter 2017 and Material Changes
| Fourth-quarter metric | Q4 2017 | Q4 2016 |
|---|---|---|
| Revenue | $3.792 billion | $2.654 billion |
| Net income | $64.8 million | $194.5 million |
| Net income attributable to ONEOK | $63.0 million | $90.5 million |
| Diluted EPS | $0.16 | $0.43 |
- Revenue growth reflected the merger, higher commodity volumes and increased fee-based activity, but commodity sales and cost of sales generally move together and largely offset.
- 2017 net income included a $141.3 million noncash income-tax charge in the fourth quarter from revaluing deferred tax balances and establishing a valuation allowance following the Tax Cuts and Jobs Act.
- Other 2017 unusual items included a $20.0 million noncash Series E Preferred Stock contribution to the ONEOK Foundation, $30.0 million of merger-related operating costs, and $20.2 million of noncash impairment charges.
- Net income attributable to noncontrolling interests fell to $205.7 million from $391.5 million because the merger eliminated most public ownership of ONEOK Partners.
- Average diluted shares increased to approximately 299.8 million from 212.4 million, primarily because of merger-related and other equity issuances; this contributed to the decline in diluted EPS despite higher attributable earnings.
- Cash flow from operations remained strong but declined modestly, while cash used in financing increased due to higher dividends, debt repayment and the transition to ONEOK-level financing.
Guidance, Outlook, Risks and Contingencies
- Management expected approximately 90% of 2018 earnings to remain fee-based and anticipated continued volume growth from the Williston, Permian, STACK and SCOOP areas.
- Management expected ethane rejection to decline from more than 150 MBbl/d on average in 2017 to approximately 70 MBbl/d by the end of 2018, with a favorable effect on results.
- 2018 projected capital expenditures were $2.09 billion to $2.48 billion, including $1.95 billion to $2.30 billion of growth capital and $140 million to $180 million of maintenance capital.
- Since June 2017, ONEOK announced approximately $4.2 billion of growth projects, including Elk Creek, Arbuckle II, MB-4, Demicks Lake, Canadian Valley, WTLPG and Sterling III expansions. Completion dates generally ranged from 2018 through 2020.
- Management expected no significant federal cash income-tax payments through at least 2021. The company also expected 85% to 95% of 2018 dividends to be treated as return of capital.
- In January 2018, ONEOK issued 21.9 million shares for net proceeds of $1.2 billion, intended to fund capital expenditures, repay debt and support general corporate purposes. Management stated that expected equity financing needs were satisfied through 2018 and well into 2019.
- Key risks include producer drilling declines, commodity-price and volumetric exposure, ethane rejection, competition and excess capacity, construction delays or cost overruns, regulatory and tariff changes, environmental and pipeline-safety liabilities, cyberattacks, counterparty defaults, interest-rate increases and the company’s substantial leverage.
- Northern Border Pipeline’s FERC-approved settlement provides for tiered rate reductions beginning in 2018, reducing rates 12.5% by January 2020 versus prior rates. Management did not expect a material impact to ONEOK.
- Gas Index Pricing Litigation settlements were finalized in 2017, and management stated that remaining litigation exposure was not material. The filing states that other reasonably possible legal losses were not material.
Important Facts for Investors to Verify
- Reconcile reported net income, attributable earnings and EPS for the merger-related change in noncontrolling interests and the substantial increase in share count.
- Assess whether 2018 growth capital of up to $2.48 billion can be funded while maintaining dividends, investment-grade ratings and acceptable leverage.
- Review debt maturities, including the $425 million due in 2018 and remaining maturities in 2019 and 2022, together with the effect of the January 2018 equity offering and debt repayments.
- Validate project economics, contract coverage, minimum-volume commitments and completion schedules for the approximately $4.2 billion project portfolio.
- Monitor ethane recovery, producer activity, throughput, commodity-price differentials and utilization rates, particularly in the NGL segment.
- Evaluate the potential effect of FERC and state regulatory actions on tariff rates, tax allowances and possible refunds following the Tax Cuts and Jobs Act.
- Review the filing’s detailed environmental, pipeline-safety, litigation, cybersecurity, pension and counterparty-credit disclosures before relying on the dividend and cash-flow outlook.