ONEOK, Inc. — Form 10-Q Summary
Reporting period: Three months ended March 31, 2014, filed May 7, 2014. ONEOK’s continuing operations principally comprise its 41.0% ownership and control of ONEOK Partners, whose businesses are natural gas gathering and processing, natural gas liquids and natural gas pipelines. The former natural gas distribution business was separated into ONE Gas on January 31, 2014, and the energy services business was wound down on March 31, 2014; both are reported as discontinued operations.
Key Financial Metrics
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Total revenues | $3.163 billion | $2.518 billion | +26% |
| Net margin | $510.6 million | $371.1 million | +38% |
| Operating income | $294.1 million | $174.7 million | +68% |
| Income from continuing operations | $204.7 million | $110.5 million | +85% |
| Net income attributable to ONEOK | $93.5 million | $112.5 million | -17% |
| Diluted EPS | $0.45 | $0.54 | Decrease |
| Diluted EPS from continuing operations | $0.44 | $0.27 | Increase |
| Cash flow from operating activities | $490.4 million | $471.5 million | +$18.9 million |
| Capital expenditures | $429.5 million | $501.1 million | -14% |
Net margin was approximately 16.1% of revenue versus 14.7% in the prior-year quarter. Operating margin was approximately 9.3% versus 6.9%. The improvement was driven primarily by higher NGL location and product differentials, increased volumes from completed growth projects, higher pipeline and storage revenues, and stronger equity earnings.
Segment Performance
- Natural Gas Gathering and Processing: Operating income increased 78% to $59.9 million, supported by Williston Basin volume growth, the Stateline II plant, higher Maysville ownership and higher realized propane prices.
- Natural Gas Liquids: Operating income increased 65% to $176.8 million. Net margin rose 44% to $269.0 million, primarily from weather-related propane demand and wider NGL location and product differentials. Ethane rejection and severe cold weather reduced volumes.
- Natural Gas Pipelines: Operating income increased 53% to $55.1 million, reflecting higher transportation rates, park-and-loan services, storage activity and retained fuel revenues.
Liquidity, Debt and Cash Flow
- Cash and cash equivalents were $210.2 million at March 31, 2014, compared with $145.6 million at December 31, 2013.
- Book value of consolidated long-term debt, including current maturities, was approximately $7.2 billion; estimated fair value was $7.8 billion.
- ONEOK repaid all commercial paper, retired approximately $152.5 million of 4.25% notes and called $400 million of 5.2% notes. The debt retirements generated a $24.8 million loss on extinguishment and additional interest expense from discontinued hedge accounting.
- ONEOK’s $300 million revolving credit facility had approximately $297.8 million available after $2.2 million of letters of credit. ONEOK’s debt-to-Consolidated EBITDA ratio was 1.5x versus a 4.0x covenant limit.
- ONEOK Partners had $125 million of commercial paper outstanding, approximately $115.4 million of cash and approximately $1.6 billion of available revolving credit. Its debt-to-adjusted-EBITDA ratio was 3.7x; the temporarily increased covenant limit was 5.5x through the third quarter of 2014.
- Cash used in investing activities was $439.3 million. ONEOK Partners’ 2014 projected capital expenditures were $2.024 billion, principally for gathering and processing and NGL projects.
- ONEOK expects to fund corporate operations and dividends primarily from distributions received from ONEOK Partners. The next ONEOK long-term debt maturity was scheduled for 2022.
Material Changes Versus the Prior Comparable Period
- Continuing operations improved materially, but consolidated net income attributable to ONEOK declined because Q1 2013 included $55.2 million of discontinued-operation income compared with $1.8 million in Q1 2014.
- The separation of ONE Gas transferred approximately $4.3 billion of assets, $2.6 billion of liabilities and $1.7 billion of equity to the new company. ONEOK received approximately $1.13 billion and distributed ONE Gas shares to ONEOK shareholders at a ratio of one ONE Gas share for every four ONEOK shares.
- ONEOK’s ownership in ONEOK Partners decreased to 41.0% from 41.2% following ONEOK Partners’ issuance of approximately 1.1 million common units.
- Interest expense increased 47%, primarily because of ONEOK Partners’ prior debt issuance and approximately $10.6 million of first-quarter charges related to discontinued hedge accounting and credit-facility issuance costs.
- Capital expenditures decreased because of project timing and the removal of a full quarter of former natural gas distribution spending.
Outlook, Risks and Unusual Items
- Management expects continued demand for midstream infrastructure as production grows in NGL-rich and crude-oil regions. ONEOK Partners planned approximately $6.0 billion to $6.4 billion of growth investments and acquisitions from 2010 through 2016.
- Ethane rejection was expected to persist through at least much of 2016 and could materially affect NGL volumes and results. New supply commitments and integrated assets are expected to mitigate part of the impact.
- Management expected narrower NGL price differentials between Conway and Mont Belvieu, with periods of volatility, as new pipelines and fractionators increase supply and capacity.
- Future cash payments related to released energy-services transportation and storage capacity were estimated at approximately $68 million after tax, including approximately $23 million during the remainder of 2014.
- The Gas Index Pricing Litigation remains unresolved. ONEOK stated that a range of potential exposure could not reasonably be estimated and that future charges could be material.
- Environmental, pipeline safety, methane and greenhouse-gas regulations could increase operating or capital costs, although the company generally did not expect currently identified requirements to have a material effect.
- Potential impairment risk remained for the Bighorn Gas Gathering investment; a decline of 10% or more in estimated fair value could result in a noncash impairment charge.
- ONEOK’s ratings were Baa3 with a stable outlook from Moody’s and BB+ with a stable outlook from S&P. ONEOK Partners remained investment grade at Baa2 and BBB, both with stable outlooks.
Investor Verification Checklist
- Verify the impact of the ONE Gas separation and energy-services wind-down on future comparability, cash flows and overhead allocations.
- Assess whether ONEOK Partners’ growth projects are completed on schedule and within the approximately $2.024 billion 2014 capital-spending plan.
- Monitor ethane rejection, NGL volumes, propane and NGL price differentials, and the increasing commodity-price sensitivity of gathering and processing operations.
- Review consolidated debt, ONEOK Partners’ leverage, credit ratings and access to commercial paper and revolving-credit facilities.
- Track the $68 million of discontinued-business capacity obligations and the unresolved Gas Index Pricing Litigation.
- Evaluate the sustainability of distributions from ONEOK Partners relative to ONEOK’s corporate costs, dividends and liquidity requirements.