ONEOK, Inc. 2016 Form 10-K Summary
Business context and reporting period
ONEOK filed its Annual Report on Form 10-K for the fiscal year ended December 31, 2016, filed February 28, 2017. The company is primarily a holding company whose principal asset and cash-generating source is its 41.2% ownership and control of ONEOK Partners, L.P. ONEOK Partners operates three midstream segments: Natural Gas Gathering and Processing, Natural Gas Liquids, and Natural Gas Pipelines. Approximately 88% of ONEOK Partners’ consolidated earnings were fee-based in 2016.
Key financial metrics
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Revenue | $8.921 billion | $7.763 billion | 15% |
| Operating income | $1.286 billion | $996.2 million | 29% |
| Income from continuing operations | $745.6 million | $385.3 million | 94% |
| Net income attributable to ONEOK | $352.0 million | $245.0 million | 44% |
| Diluted EPS from continuing operations | $1.67 | $1.19 | 40% |
| Adjusted EBITDA | $1.829 billion | $1.560 billion | 17% |
| Cash flow from operating activities | $1.352 billion | $1.007 billion | 34% |
| Capital expenditures | $624.6 million | $1.188 billion | (47%) |
| Cash and cash equivalents | $248.9 million | $97.6 million | 155% |
| Long-term debt, including current maturities | $8.331 billion | $8.434 billion | (1%) |
| Dividends declared per share | $2.46 | $2.43 | 1% |
Calculated consolidated margins were approximately 14.4% for operating income, 3.9% for net income attributable to ONEOK, and 20.5% for adjusted EBITDA. Commodity sales increased 12% to $6.859 billion, while service revenue increased 24% to $2.062 billion.
- Natural Gas Gathering and Processing adjusted EBITDA was $446.8 million, up 40%; average fee rates increased to $0.76 per MMBtu from $0.44.
- Natural Gas Liquids adjusted EBITDA was $1.080 billion, up 11%, supported by higher exchange-service volumes, new plant connections and increased ethane recovery.
- Natural Gas Pipelines adjusted EBITDA was $313.1 million, up 14%, primarily from higher firm demand-charge capacity and completion of the WesTex expansion and Roadrunner phases.
- ONEOK Partners paid $3.16 per unit in cash distributions during 2016 and paid ONEOK $790.0 million through its limited-partner and general-partner interests, including incentive distributions.
Material changes versus the prior comparable period
- Results improved substantially as completed growth projects increased natural gas and NGL volumes, contract restructuring shifted earnings toward higher fee revenue, and the Natural Gas Liquids segment benefited from increased ethane recovery.
- Lower realized NGL and natural gas prices, higher depreciation, increased labor and employee-related costs, and December weather impacts partially offset the operating improvement.
- 2015 included $264.3 million of noncash impairment charges, including $180.6 million related to Powder River Basin equity investments and $83.7 million related primarily to long-lived assets. No comparable impairment charge was recorded in 2016.
- Operating cash flow increased by $344.6 million, while capital expenditures declined by $563.7 million as major projects were completed and spending was aligned with producer demand.
- Financing cash flow changed from $108.5 million provided in 2015 to $584.8 million used in 2016, primarily because ONEOK Partners repaid approximately $1.1 billion of senior notes and made higher distributions.
- ONEOK Partners drew the full $1.0 billion term loan in 2016, used partly to refinance debt, and ended the year with $1.1 billion of commercial paper outstanding and approximately $1.3 billion of available capacity under its $2.4 billion revolving credit facility.
Guidance, outlook, risks and unusual items
Management expects 2017 growth from continued producer activity in the STACK and SCOOP areas, increased natural gas and NGL volumes, available processing capacity in Oklahoma and the Williston Basin, and demand for takeaway capacity. Management also expects ethane recovery and related financial benefits to improve primarily in the second half of 2017 as petrochemical and export capacity expands.
Projected 2017 capital expenditures are $520 million to $640 million, compared with $624.6 million in 2016. Planned projects include approximately $100 million for Phase II of the Bakken NGL Pipeline expansion and $30 million to $40 million for Phase III of Roadrunner, subject to the disclosed timing and cost estimates.
On January 31, 2017, ONEOK and ONEOK Partners entered into an all-stock merger agreement under which ONEOK would acquire the publicly held ONEOK Partners common units at an exchange ratio of 0.985 ONEOK shares per unit. Closing was expected in the second quarter of 2017, subject to approvals and other conditions. Termination fees could reach $300 million in certain circumstances, and the transaction could result in cross-guarantees of the parties’ debt.
- Key operating risks include commodity-price volatility, producer drilling declines, ethane rejection, weather, operational outages, customer and counterparty credit risk, competition and uncontracted capacity.
- Regulatory risks include FERC rate decisions, potential changes to income-tax allowances, pipeline-safety rules, environmental requirements, greenhouse-gas regulation and PHMSA oversight.
- ONEOK reported approximately $1.6 billion of its own indebtedness, excluding ONEOK Partners’ debt. ONEOK Partners reported approximately $7.9 billion of indebtedness and a debt-to-adjusted-EBITDA ratio of 4.1 to 1, within its 5.0 to 1 covenant.
- Gas-index pricing litigation settlements reached in 2016 were described as immaterial; the Sinclair case remained unresolved, with future charges expected by management to be immaterial.
- The company’s independent auditor reported an unqualified opinion and effective internal control over financial reporting as of December 31, 2016.
Important facts for investors to verify
- Confirm completion terms, financing effects, debt guarantees and pro forma leverage associated with the ONEOK–ONEOK Partners merger.
- Assess whether STACK/SCOOP volume growth and increased ethane recovery offset natural production declines and continued commodity-price exposure.
- Review near-term ONEOK Partners debt maturities, including $400 million due in 2017, $425 million in 2018 and $1.5 billion in 2019.
- Reconcile consolidated debt and liquidity with the separate obligations and available credit facilities of ONEOK and ONEOK Partners.
- Evaluate the sustainability of the $2.46 annualized dividend against distributions from ONEOK Partners, operating cash flow and future capital spending.
- Review exposure to FERC rate policy, pipeline-safety and environmental requirements, litigation, counterparty credit risk and potential future impairment charges.