ONEOK, Inc. — Form 10-Q Summary
Business context and reporting period
ONEOK, Inc. filed an unaudited Form 10-Q for the three months ended March 31, 2010, with comparative information for the three months ended March 31, 2009. The company operates through ONEOK Partners, Distribution and Energy Services. Results are seasonal and the first quarter is not necessarily indicative of full-year performance.
ONEOK consolidated ONEOK Partners and held a 42.8% aggregate ownership interest at March 31, 2010. The company serves more than two million natural gas distribution customers in Oklahoma, Kansas and Texas.
Key financial metrics
| Metric | Q1 2010 | Q1 2009 | Change |
|---|---|---|---|
| Revenue | $3.924 billion | $2.790 billion | +41% |
| Net margin | $619.3 million | $551.4 million | +12% |
| Operating income | $337.3 million | $293.0 million | +15% |
| Net income | $186.7 million | $163.5 million | +14% |
| Net income attributable to ONEOK | $154.5 million | $122.3 million | +26% |
| Diluted EPS | $1.44 | $1.16 | +$0.28 |
| Dividends declared per share | $0.44 | $0.40 | +10% |
| Cash provided by operating activities | $558.7 million | $790.9 million | -29% |
| Capital expenditures | $68.3 million | $243.0 million | -72% |
Reported revenue increased primarily because of higher commodity prices and higher activity. The gross revenue increase outpaced net margin growth because cost of sales and fuel increased 48% to $3.305 billion. Net margin was approximately 15.8% of revenue versus 19.8% in the prior-year quarter; operating margin was approximately 8.6% versus 10.5%.
Liquidity, debt and capital structure
- Cash and cash equivalents were $167.4 million at March 31, 2010, compared with $29.4 million at December 31, 2009.
- Long-term debt, including current maturities, was approximately $4.6 billion at March 31, 2010; estimated fair value was $4.9 billion.
- Notes payable declined to $310.0 million from $881.9 million at year-end 2009. ONEOK had no commercial paper outstanding, compared with $358.9 million at December 31, 2009.
- ONEOK had approximately $1.2 billion available under its credit agreement and $37.0 million of issued letters of credit. ONEOK Partners had $310.0 million outstanding and approximately $558 million of borrowing capacity under its credit agreement.
- ONEOK’s stand-alone debt-to-capital ratio was 38.5%, versus a 67.5% covenant maximum. ONEOK Partners’ indebtedness-to-adjusted-EBITDA ratio was 4.3 to 1, versus a 5.0 to 1 covenant maximum. Both entities were in compliance with their covenants.
- Consolidated shareholders’ equity increased to $3.880 billion from $3.445 billion, largely reflecting the February 2010 issuance of ONEOK Partners common units.
Material changes versus the prior comparable period
- Energy Services: Net margin increased 90% to $110.6 million and operating income increased 98% to $103.0 million. Higher realized storage differentials and marketing margins more than offset lower premium-services margins caused by colder weather and higher customer-peaking demand.
- ONEOK Partners: Net margin increased 3% to $261.1 million, but operating income declined 4% to $120.2 million. Higher NGL volumes and transportation margins were offset by lower optimization margins, operational measurement effects, higher operating costs and increased depreciation.
- Distribution: Net margin increased 3% to $246.8 million, while operating income declined 2% to $113.7 million. Higher riders, transportation volumes and sales volumes were offset by higher operating and employee-related costs.
- Cash flow: Operating cash flow declined because the prior-year period benefited more from working-capital movements, including storage changes and collateral-related effects. Investing cash usage fell substantially as major ONEOK Partners projects were completed.
- ONEOK Partners equity offering: The partnership issued 5.5 million common units for net proceeds of approximately $322.7 million, used principally to repay borrowings and for general partnership purposes. ONEOK’s ownership declined to 42.8% from 45.1% at year-end 2009.
- Segment presentation: Retail marketing responsibility moved from Energy Services to Distribution, and prior-period segment amounts were recast.
Guidance, outlook, risks and unusual items
- Management expected a moderate economic recovery in 2010, improving commodity prices compared with 2009 and improved credit markets, while noting potential inflationary pressure beginning in 2011.
- Projected 2010 capital expenditures were $603 million: $362 million for ONEOK Partners, $217 million for Distribution and $24 million for Other.
- In April 2010, ONEOK Partners announced planned Bakken and Woodford Shale investments of approximately $405 million to $470 million, including a new 100 MMcf/d Garden Creek processing plant expected to be completed in the fourth quarter of 2011.
- ONEOK Partners expected to refinance its $250 million of senior notes due June 15, 2010, through its credit agreement.
- ONEOK declared a quarterly dividend of $0.44 per share for the second quarter of 2010. ONEOK Partners declared a quarterly distribution of $1.11 per unit, compared with $1.08 per unit in the prior-year period.
- Commodity prices, weather, storage and transportation spreads, derivative valuations, counterparty credit, interest rates and access to capital markets remain significant risks. Energy Services reported one-day, 95% confidence-value-at-risk of $5.8 million at March 31, 2010, compared with $7.0 million at March 31, 2009.
- A downgrade below investment grade could increase collateral requirements and borrowing costs and could trigger repurchase obligations for certain ONEOK Partners senior notes. The filing estimated an additional $9.4 million of collateral could have been required for certain derivative contracts at March 31, 2010.
- Environmental and regulatory risks include proposed greenhouse-gas and emissions rules, potential compliance capital expenditures, pipeline integrity requirements and possible changes in regulated cost recovery. Costs associated with the proposed greenhouse-gas Tailoring Rule were not clear in the filing.
- Williams had an option exercisable on or before November 17, 2010, to increase its ownership in Overland Pass Pipeline Company to 50%, potentially requiring ONEOK Partners to deconsolidate the joint venture and use equity-method accounting.
- The filing disclosed ongoing gas-index pricing litigation and other ordinary-course litigation, but management believed the ultimate outcomes would not materially affect consolidated results, financial position or liquidity.
- Disclosure controls and procedures were effective as of March 31, 2010, and no material changes to internal controls over financial reporting were reported.
Important facts for investors to verify
- Whether higher Energy Services margins were sustainable or primarily reflected temporary storage spreads, hedging results and market volatility.
- The timing, funding and returns of the planned $603 million 2010 capital program and the additional Bakken and Woodford investments.
- ONEOK Partners’ refinancing of the $250 million June 2010 maturity and continued compliance with its 4.3-to-1 leverage covenant.
- The effect of the reduced ownership interest in ONEOK Partners on future distributions, noncontrolling interests and ONEOK earnings.
- Potential collateral, liquidity and earnings impacts from commodity-price volatility, derivative fair-value changes or a credit-rating downgrade.
- Regulatory outcomes affecting Oklahoma, Kansas and Texas distribution rates, including the rejected El Paso rate increase and related appeal.
- Potential costs from environmental, greenhouse-gas, air-quality and pipeline-safety requirements, which were not fully quantifiable at the filing date.