ONEOK, Inc. 2010 Q3 Form 10-Q Summary
Business context and reporting period
ONEOK, Inc. filed an unaudited Form 10-Q for the quarter and nine months ended September 30, 2010, filed November 3, 2010. Operations comprised ONEOK Partners, Distribution and Energy Services. ONEOK consolidated ONEOK Partners but owned a 42.8% aggregate interest at quarter-end. Results are seasonal and are not necessarily indicative of a full year.
Financial performance and key metrics
| Metric | Q3 2010 | Q3 2009 | 9M 2010 | 9M 2009 |
|---|---|---|---|---|
| Revenue | $2,942.7 million | $2,364.7 million | $9,673.8 million | $7,382.2 million |
| Net margin | $451.4 million | $451.9 million | $1,528.8 million | $1,435.7 million |
| Operating income | $186.9 million | $173.8 million | $702.9 million | $621.6 million |
| Net income attributable to ONEOK | $55.3 million | $48.0 million | $251.6 million | $212.0 million |
| Diluted EPS | $0.51 | $0.45 | $2.34 | $2.00 |
| Cash provided by operating activities | Not separately presented | Not separately presented | $760.0 million | $1,270.9 million |
| Capital expenditures | $176.6 million | $207.2 million | $356.3 million | $614.8 million |
Q3 revenue increased 24%, while nine-month revenue increased 31%, primarily reflecting higher commodity prices. Net margin was essentially flat in the quarter and increased 6% for the nine months. Calculated net-margin percentage declined to approximately 15.3% from 19.1% in Q3 and to 15.8% from 19.4% for the nine-month period, reflecting the effect of higher commodity-related revenue and cost of sales. Operating income increased 8% in Q3 and 13% for the nine months. Diluted EPS increased 13% in Q3 and 17% for the nine months.
At September 30, 2010, cash and cash equivalents were $50.5 million, compared with $29.4 million at December 31, 2009. Total assets were $11.9 billion and total equity was $3.9 billion. Long-term debt, including current maturities, had a $4.3 billion book value and an estimated fair value of $4.8 billion. Notes payable were $326.4 million, all associated with ONEOK Partners commercial paper.
ONEOK generated $760.0 million of operating cash flow, used $818.4 million in financing activities and generated $79.5 million from investing activities. Investing cash flow benefited from approximately $423.7 million of proceeds from the sale of a 49% interest in Overland Pass Pipeline Company. Dividends paid were $142.4 million, and distributions to noncontrolling interests were $192.9 million.
Material changes versus the prior comparable period
- ONEOK Partners' nine-month net margin increased $26.9 million, supported by higher NGL volumes, transportation margins and storage margins, partly offset by lower NGL optimization margins and lower Powder River Basin gathering volumes.
- ONEOK Partners' Q3 net margin declined $6.9 million because of narrower NGL market differentials, limited fractionation and transportation capacity, and lower optimization margins.
- Distribution net margin increased 15% in Q3 and 8% for the nine months, primarily because of Oklahoma rate changes that increased fixed-fee recovery and reduced volumetric sensitivity.
- Energy Services net margin decreased 47% in Q3 because of lower seasonal storage differentials, marketing margins, premium-service margins and transportation margins. Nine-month net margin increased 22%, mainly due to stronger realized storage and marketing margins.
- ONEOK Partners completed a public offering generating approximately $322.7 million of net proceeds and established a $1.0 billion commercial paper program. At September 30, it had $326.4 million of commercial paper outstanding and approximately $673.6 million of credit available.
- ONEOK Partners sold a 49% interest in Overland Pass Pipeline Company for approximately $423.7 million, retained a 50% equity-method interest and recognized an approximately $16.3 million gain. The retained investment was recorded at approximately $438.0 million.
- ONEOK Partners' ownership percentage declined from 45.1% at December 31, 2009, to 42.8% at September 30, 2010, primarily due to the unit issuance.
- Capital expenditures fell 42% for the nine months, primarily because major 2009 projects had been completed. Management projected 2010 capital expenditures of $697 million, including $464 million for ONEOK Partners and $215 million for Distribution.
Guidance, outlook, risks and unusual items
- ONEOK Partners announced approximately $1.3 billion to $1.6 billion of growth projects, primarily in the Williston Basin. Projects included new processing plants, the Bakken Pipeline, Overland Pass expansions, Bushton fractionation expansion, Sterling I expansion and Woodford Shale connections.
- Management expected Garden Creek and related projects to enter service by the end of 2011 and Stateline I during the third quarter of 2012. The filing does not provide consolidated earnings guidance.
- In October 2010, the board authorized a three-year repurchase program for up to $750 million of common stock, limited to $300 million in any calendar year. A third-quarter dividend of $0.48 per share was declared, up from $0.42 in October 2009.
- ONEOK's credit agreement expires in July 2011; ONEOK Partners' agreement expires in March 2012. ONEOK had approximately $1.2 billion of credit available and no commercial paper outstanding. ONEOK Partners had approximately $673.6 million of credit available. Both entities were in compliance with their covenants.
- ONEOK's and ONEOK Partners' long-term ratings were investment grade: Moody's Baa2 and S&P BBB, each with a stable outlook. A downgrade below investment grade could increase collateral requirements and constrain marketing and trading activities.
- Key exposures include commodity prices, weather, storage and transportation differentials, counterparty credit, interest rates, regulatory rate recovery, pipeline and facility integrity, environmental compliance, project execution, access to capital markets and production declines.
- The filing identified environmental obligations at 12 former manufactured-gas sites in Kansas. Historical environmental spending had not been material. Potential future costs from changing greenhouse-gas, air-quality and pipeline-safety requirements were uncertain.
- Q3 cost of sales included a $47.4 million lower-of-cost-or-market adjustment for natural gas inventory, with related deferred hedge gains reclassified into earnings. No goodwill or indefinite-lived intangible-asset impairment was recorded.
- Net derivative assets totaled approximately $109.1 million at September 30, 2010, and net derivative liabilities were approximately $38.8 million before firm commitments. A credit-rating trigger could have required an additional $7.0 million of collateral at quarter-end.
- The company stated that litigation, including remaining gas-index-pricing claims, was not expected to have a material adverse effect, but outcomes cannot be predicted with certainty.
Investor verification checklist
- Verify the sustainability of higher Distribution margins from Oklahoma rate changes and the status of the Texas Gas Service rate proceeding.
- Verify project spending, permitting, construction schedules and committed volumes supporting the $1.3 billion to $1.6 billion ONEOK Partners growth program.
- Reconcile consolidated debt, ONEOK Partners commercial paper, covenant ratios and available borrowing capacity, particularly around the July 2011 ONEOK credit-agreement expiration.
- Assess the impact of NGL price differentials, fractionation constraints, storage economics and production trends on ONEOK Partners and Energy Services results.
- Evaluate cash available to fund dividends, distributions, the announced share-repurchase program, projected capital expenditures and the expected $51 million ONEOK Partners share of a 2011 Northern Border Pipeline contribution.
- Review derivative fair values, collateral requirements and the potential earnings volatility from mark-to-market and hedge accounting.
- Monitor environmental, greenhouse-gas, pipeline-safety and air-quality rules, as well as pending litigation and regulatory recovery of deferred costs.