ONEOK, Inc. 2013 Q3 Form 10-Q Summary
Business Context and Reporting Period
ONEOK, Inc. reported unaudited results for the three and nine months ended September 30, 2013. Its principal businesses were ONEOK Partners, a consolidated midstream master limited partnership; regulated natural gas distribution operations in Oklahoma, Kansas and Texas; and Energy Services, which was being wound down. ONEOK owned a 41.3% economic interest in ONEOK Partners at quarter-end and retained control through its general-partner interest.
Results are seasonal and are not necessarily indicative of full-year performance.
Financial Performance and Key Metrics
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Revenue | $3.572 billion | $3.029 billion | $10.463 billion | $8.973 billion |
| Net margin | $561.2 million | $554.0 million | $1.638 billion | $1.747 billion |
| Operating income | $230.1 million | $242.9 million | $632.1 million | $802.9 million |
| Net income | $147.7 million | $165.0 million | $392.9 million | $547.7 million |
| Net income attributable to ONEOK | $62.4 million | $65.2 million | $175.8 million | $249.1 million |
| Diluted EPS | $0.30 | $0.31 | $0.84 | $1.11 |
| Capital expenditures | $537.5 million | $458.2 million | $1.598 billion | $1.239 billion |
Q3 net margin increased 1%, while nine-month net margin declined 6%. Operating margin declined in both periods as increased volumes and regulated rates were offset by narrower NGL price differentials, ethane rejection, lower realized commodity prices, higher depreciation and Energy Services wind-down charges.
Net cash provided by operating activities was $1.022 billion for the first nine months, compared with $762.9 million in 2012. Investing cash outflows were $1.881 billion, including $1.598 billion of capital expenditures and the $304.9 million Sage Creek acquisition. Financing cash inflows were $1.055 billion. Cash and cash equivalents ended at $779.5 million, up from $583.6 million at December 31, 2012.
Balance Sheet, Debt and Liquidity
- Total assets were $17.610 billion at September 30, 2013, compared with $15.855 billion at year-end 2012.
- Long-term debt, including current maturities, was approximately $7.768 billion on a book-value basis, versus $6.526 billion at December 31, 2012. Estimated fair value was $8.1 billion.
- Notes payable were $562.3 million, including $515.3 million of ONEOK commercial paper and $47.0 million of ONEOK Partners commercial paper.
- ONEOK had approximately $682.8 million of availability under its $1.2 billion revolving credit facility, after commercial paper and letters of credit. ONEOK Partners had approximately $1.2 billion of availability under its facility.
- ONEOK's stand-alone debt-to-capital ratio under its credit agreement was 48.2%, compared with a 67.5% covenant limit. ONEOK Partners' indebtedness-to-adjusted-EBITDA ratio was 4.2 to 1, compared with a temporarily increased 5.5-to-1 limit following the Sage Creek acquisition. Both entities were in compliance with their covenants.
- ONEOK Partners issued $1.25 billion of senior notes in September 2013 and used approximately $1.24 billion of proceeds principally to repay commercial paper and fund general partnership purposes.
- ONEOK Partners issued 11.5 million common units in August 2013, generating approximately $553.4 million of net proceeds. ONEOK's ownership declined from 43.4% at December 31, 2012, to 41.3% at September 30, 2013.
Material Changes Versus the Prior Comparable Period
- Revenue increased 18% in Q3 and 17% for the first nine months, primarily from higher ONEOK Partners volumes and new Natural Gas Distribution rates.
- Operating income decreased 5% in Q3 and 21% for the first nine months. The principal pressures were Energy Services wind-down charges, narrower NGL location differentials, ethane rejection, lower realized natural gas and NGL prices, and higher depreciation and operating costs.
- Net income attributable to ONEOK declined 4% in Q3 and 29% for the first nine months. Diluted EPS declined to $0.30 from $0.31 in Q3 and to $0.84 from $1.11 for the first nine months.
- ONEOK Partners' nine-month net margin declined 3% despite higher volumes, primarily because optimization and marketing margins fell $173.8 million, ethane rejection reduced margin by $32.0 million, and realized NGL prices were lower. These effects were partly offset by higher exchange-services margins and Williston Basin volume growth.
- Natural Gas Distribution operating income increased 12% in Q3 and 17% for the first nine months, supported by new rates and, for the nine-month period, colder weather and higher sales volumes.
- Energy Services recorded a $16.4 million noncash charge in Q3 and $130.2 million for the first nine months related to releasing transportation and storage contracts. The prior-year period included a $10.3 million goodwill impairment charge that did not recur in 2013.
- Capital expenditures increased 17% in Q3 and 29% for the first nine months, driven principally by ONEOK Partners growth projects.
Outlook, Management Commentary, Risks and Unusual Items
- ONEOK authorized a plan to separate its Natural Gas Distribution segment into a standalone publicly traded company, ONE Gas. The transaction was expected to be tax-free, subject to regulatory approvals, and the board retained discretion over whether and when to complete it. ONE Gas filed a Form 10 registration statement on October 1, 2013.
- ONEOK announced an accelerated wind down of Energy Services and expected substantially all operations to cease by March 31, 2014, with discontinued-operations classification expected effective April 1, 2014. Additional noncash charges of approximately $12 million before tax were expected through March 31, 2014, and future after-tax cash payments related to released capacity were estimated at approximately $89 million.
- Management expected ethane rejection to continue through 2014 and, in some Rocky Mountain areas, through much of 2015. Ethane rejection was expected to materially affect ONEOK Partners' financial results, although minimum-volume agreements, optimization opportunities and new supply commitments were expected to provide partial mitigation.
- ONEOK Partners projected 2013 capital expenditures of approximately $2.1 billion; Natural Gas Distribution projected $286 million; and other expenditures were projected at $30 million, for a total of $2.416 billion.
- ONEOK Partners completed the $305 million Sage Creek acquisition in Wyoming and planned approximately $135 million of related gathering, processing and NGL infrastructure investments.
- ONEOK Partners continued a large growth program, with approximately $5.3 billion to $5.6 billion of new capital projects planned from 2010 through 2016. Management identified commodity-price exposure as increasing as more POP-based volumes enter service.
- ONEOK and ONEOK Partners retained investment-grade ratings, but ONEOK ratings carried negative outlooks and ONEOK Partners' S&P outlook was negative. Rating downgrades could increase borrowing and collateral costs or restrict commercial-paper access.
- Gas Index Pricing Litigation remained unresolved. The Ninth Circuit reversed prior summary judgments and stayed the cases pending the defendants' Supreme Court petition. The company could not estimate potential exposure and stated that future charges could be material.
- Key operating risks include commodity prices, NGL differentials, ethane rejection, producer drilling activity, project execution, regulatory approvals, environmental and pipeline-safety requirements, counterparty credit, access to capital markets and potential impairment of investments such as Bighorn Gas Gathering.
Important Facts for Investors to Verify
- Whether and when the ONE Gas separation was completed, including regulatory approvals, transaction terms and resulting ONEOK credit ratings.
- The final costs and cash payments from the Energy Services wind down, including any additional charges after September 30, 2013.
- ONEOK Partners' ability to fund its capital program while maintaining leverage, distributions and access to debt and equity markets.
- The effect of NGL price differentials, ethane rejection and commodity prices on ONEOK Partners' margins and cash distributions.
- The status and potential financial exposure of the Gas Index Pricing Litigation.
- Progress, final cost and customer commitments for the Sage Creek acquisition and other major growth projects.
- Changes in debt balances, covenant headroom, liquidity availability and credit ratings following the planned corporate separation.