ONEOK, Inc. 2010 Form 10-K Summary
Business context and reporting period
ONEOK filed its annual report for the fiscal year ended December 31, 2010, covering ONEOK, Inc. and its subsidiaries. The company operates through three segments: ONEOK Partners, Distribution and Energy Services. ONEOK owns 42.8% of ONEOK Partners and is its sole general partner. The Distribution segment serves more than 2 million natural gas customers in Oklahoma, Kansas and Texas.
Although the filing is a Form 10-K, it includes unaudited quarterly data. Fourth-quarter 2010 revenue was $3.36 billion, net income attributable to ONEOK was $83.1 million and diluted EPS was $0.76.
Key financial metrics
| Metric | 2010 | 2009 | Change |
|---|---|---|---|
| Revenue | $13.03 billion | $11.11 billion | 17% |
| Net margin | $2.07 billion | $2.02 billion | 3% |
| Operating income | $944.0 million | $894.6 million | 6% |
| Net income | $541.3 million | $491.2 million | 10% |
| Net income attributable to ONEOK | $334.6 million | $305.5 million | 10% |
| Diluted EPS | $3.10 | $2.87 | 8% |
| Cash provided by operating activities | $834.0 million | $1.45 billion | (43%) |
| Capital expenditures | $582.7 million | $791.2 million | (26%) |
| Total assets | $12.50 billion | $12.83 billion | (3%) |
| Long-term debt, including current maturities | $4.33 billion | $4.60 billion | (6%) |
Reported revenue growth was largely volume- and commodity-price-driven. Approximate consolidated margins were 15.9% for net margin, 7.2% for operating income and 2.6% for net income attributable to ONEOK, based on reported revenue.
At December 31, 2010, ONEOK had $31.0 million of cash, $127.0 million of commercial paper outstanding, $27.0 million of letters of credit and approximately $1.0 billion of available credit under its revolving credit agreement. ONEOK's stand-alone debt-to-capital ratio was 39.4%, compared with a covenant limit of 67.5%. ONEOK Partners had $429.9 million of commercial paper outstanding and approximately $570.1 million of available credit under its credit agreement.
ONEOK and ONEOK Partners retained investment-grade ratings of BBB/Stable from S&P and Baa2/Stable from Moody's. Consolidated capitalization, excluding ONEOK Partners debt, was approximately 40% debt and 60% equity. Total contractual obligations disclosed were $10.60 billion, including debt, interest, leases, derivatives, transportation and storage contracts, and other commitments.
Material changes versus the prior comparable period
- ONEOK Partners' operating income increased 7% to $586.3 million. Higher NGL volumes, transportation capacity, Williston Basin processing volumes and storage margins were partly offset by lower NGL optimization margins and weaker volumes in certain mature production areas.
- Distribution operating income increased 2% to $226.4 million. Oklahoma rate changes, higher fixed charges and recovery mechanisms improved margin stability; higher integrity-management costs were also recognized and recovered through rates.
- Energy Services operating income increased 6% to $130.7 million, while net margin was essentially unchanged at $159.7 million. Higher storage and marketing margins offset lower transportation and premium-services margins.
- Equity earnings from investments increased 40% to $101.9 million, driven primarily by Northern Border Pipeline and the new equity-method accounting for Overland Pass Pipeline Company.
- ONEOK Partners sold a 49% interest in Overland Pass Pipeline Company for approximately $423.7 million, retained a 50% interest, deconsolidated the investment and recognized a gain of approximately $16.3 million.
- ONEOK Partners completed a $322.7 million net common-unit offering and repaid $250 million of maturing senior notes during 2010.
- ONEOK's ownership interest in ONEOK Partners declined from 45.1% to 42.8% following the partnership's equity issuance.
- Operating cash flow declined primarily because changes in operating assets and liabilities used $160.9 million of cash, including increased commodity inventories. Cash used in investing activities fell to $134.4 million, helped by lower capital spending and proceeds from the Overland transaction.
- ONEOK paid $1.82 per share in dividends, up approximately 11% from 2009. The January 2011 dividend was increased to $0.52 per share, or $2.08 annualized. No shares had been repurchased under the authorized $750 million, three-year program as of February 21, 2011.
Guidance, outlook, commentary and risks
- Management projected 2011 capital expenditures of $1.36 billion, including $1.12 billion for ONEOK Partners and $224 million for Distribution.
- ONEOK Partners announced approximately $1.8 billion to $2.1 billion of growth projects, primarily in the Williston Basin, Cana-Woodford Shale and Granite Wash areas. Projects include processing plants, NGL pipelines, fractionation expansions and gathering-system upgrades.
- Management expected operating cash flow, existing resources and distributions from ONEOK Partners to support operations, planned projects and the stock-repurchase program. No specific earnings guidance was provided in the filing text.
- ONEOK Partners' January 2011 issuance of $1.3 billion of senior notes generated approximately $1.28 billion of net proceeds, intended for commercial-paper repayment, capital expenditures and repayment of $225 million of notes due March 2011.
- Key risks include natural gas, crude oil and NGL price volatility; lower drilling and production near assets; weather and seasonality; competition and uncontracted capacity; counterparty and collateral risk; access to capital and credit-rating risk; construction delays and cost overruns; regulatory rate recovery; environmental and pipeline-integrity liabilities; and potential effects of Dodd-Frank and greenhouse-gas regulation.
- Energy Services' value-at-risk was $2.9 million at December 31, 2010, versus $5.4 million at December 31, 2009. Derivative assets and liabilities and non-qualifying economic hedges can create earnings volatility.
- The company reported no material impairment charges in 2010 and stated that environmental expenditures and current litigation were not expected to have a material adverse effect, although outcomes and future regulatory costs remain uncertain.
- Internal controls over financial reporting and disclosure controls were deemed effective, and the independent auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Reconcile consolidated ONEOK results with ONEOK Partners' stand-alone results, distributions and noncontrolling interests, particularly after the decline in ONEOK's ownership percentage.
- Assess whether the projected $1.36 billion of 2011 capital spending and the $1.8 billion to $2.1 billion ONEOK Partners growth program can be funded while maintaining investment-grade ratings and distributions.
- Review the near-term debt maturities, the January 2011 debt issuance, commercial-paper balances and the renewal of ONEOK's revolving credit agreement due in July 2011.
- Monitor cash conversion: operating cash flow fell sharply despite higher earnings, largely because of working-capital and inventory movements.
- Evaluate sensitivity to NGL, natural gas and crude oil prices, basis differentials, drilling activity and weather, including the filing's disclosed commodity-price sensitivities.
- Review regulatory assets of approximately $463.9 million and the assumptions supporting continued recovery through customer rates.
- Track legal proceedings involving gas-index pricing and producer measurement claims, environmental remediation, pipeline integrity and evolving emissions requirements.
- Confirm the status, timing, permitting and costs of the Williston Basin, Bakken Pipeline, Bushton and Mid-Continent projects.