ONEOK, Inc. Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2011; unaudited. ONEOK operates through ONEOK Partners, Distribution and Energy Services. Results are seasonal and are not necessarily indicative of full-year performance.
Financial performance and position
| Metric | Three months ended June 30, 2011 | Year-over-year change | Six months ended June 30, 2011 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $3.514 billion | +25% | $7.381 billion | +10% |
| Net margin | $521.6 million | +14% | $1.155 billion | +7% |
| Operating income | $216.9 million | +21% | $547.0 million | +6% |
| Net income | $134.8 million | +56% | $334.1 million | +22% |
| Net income attributable to ONEOK | $55.1 million | +32% | $185.3 million | -6% |
| Diluted earnings per share | $0.51 | +$0.12 | $1.71 | -$0.11 |
- Approximate consolidated net margin was 14.8% for the quarter and 15.6% year to date; operating margin was approximately 6.2% and 7.4%, respectively.
- Quarterly results benefited primarily from stronger ONEOK Partners performance, including higher NGL optimization margins, NGL volumes and realized commodity prices. Earnings attributable to ONEOK were reduced by higher income allocated to noncontrolling interests in ONEOK Partners.
- Six-month operating cash flow was $875.6 million, up from $591.1 million. Capital expenditures were $523.8 million, versus $179.7 million in the prior-year period.
- Cash and cash equivalents were $477.6 million at June 30, 2011, compared with $31.0 million at December 31, 2010. Cash increased by $446.5 million during the first six months.
- Book value of long-term debt, including current maturities, was approximately $5.0 billion; estimated fair value was $5.4 billion. Notes payable were $526.6 million. Consolidated capitalization was 57% long-term debt and 43% equity.
- ONEOK had $526.6 million of commercial paper outstanding, $45.4 million of available cash and approximately $671.4 million of unused capacity under its $1.2 billion revolving credit agreement. ONEOK Partners had approximately $432.2 million of cash and $1.0 billion of available credit, with no commercial paper or revolving-credit borrowings outstanding.
Material changes versus the prior comparable period
- ONEOK Partners: Quarterly operating income increased 38% to $202.0 million; six-month operating income increased 43% to $379.6 million. NGL optimization margins improved substantially because of more favorable Conway-to-Mont Belvieu differentials and additional fractionation and transportation capacity. Equity earnings increased 43% for the quarter and 47% year to date.
- Distribution: Operating income declined 35% for the quarter and 14% year to date. Net margin was essentially unchanged, but operating costs and depreciation increased, including higher share-based compensation, pension and health-benefit costs and regulatory amortization.
- Energy Services: Quarterly operating income declined to a $5.8 million loss from $0.9 million of income; six-month operating income declined 60% to $42.0 million. Narrower natural-gas location differentials, lower hedge settlements, reduced volatility and lower storage and transportation opportunities materially pressured results. Management expected these conditions to persist into 2012.
- Overland Pass Pipeline Company was deconsolidated in September 2010 after ONEOK Partners sold a 49% interest and began using the equity method, reducing reported consolidated volumes and affecting comparability.
- ONEOK Partners issued $1.3 billion of senior notes in January 2011. ONEOK repaid $400 million of maturing senior notes in April. ONEOK also paid $300 million under an accelerated share repurchase agreement and initially received approximately 3.7 million shares.
Guidance, outlook, risks and unusual items
- Management projected 2011 capital expenditures of approximately $1.55 billion, including $1.292 billion for ONEOK Partners, $238 million for Distribution and $20 million for Other.
- ONEOK Partners announced approximately $2.7 billion to $3.3 billion of new growth projects in the Bakken, Cana-Woodford, Granite Wash, Mid-Continent and Gulf Coast areas. Projects include processing plants, NGL pipelines, fractionators and capacity expansions, with anticipated future earnings and cash flows but execution, permitting, cost and timing risks.
- On June 30, 2011, ONEOK sold OBPI and related Bushton Plant interests to ONEOK Partners for approximately $94.2 million, including reimbursement of obligations under the prior processing agreement.
- ONEOK declared a second-quarter dividend of $0.56 per share, up from $0.46 declared in July 2010. ONEOK Partners declared a distribution of $0.585 per unit, up from $0.56. A two-for-one ONEOK Partners unit split was completed on July 12, 2011.
- ONEOK and ONEOK Partners maintained investment-grade ratings of Baa2/Stable from Moody’s and BBB/Stable from S&P. A downgrade below investment grade could increase borrowing and collateral requirements and could restrict Energy Services trading activities; derivative contracts could have required approximately $16.3 million of collateral upon such a downgrade.
- Key risks include commodity-price volatility, counterparty credit exposure, weather, production declines, narrower transportation and storage spreads, capital-intensive growth projects, debt and refinancing needs, environmental and pipeline-safety regulation, permitting, litigation, regulatory rate recovery and access to capital markets.
- Environmental expenditures and ordinary-course litigation were not expected to have a material effect, although potential liabilities from spills, remediation, emissions rules and pipeline requirements could be material. Gas-index pricing litigation remained subject to appeals and certain claims.
- Disclosure controls and procedures were reported effective, with no material changes in internal control over financial reporting during the quarter.
Investor verification items
- Verify the sustainability of ONEOK Partners’ NGL optimization margins and the effect of commodity-price and location-differential changes on future earnings.
- Reconcile consolidated cash and debt with the separately available liquidity of ONEOK and ONEOK Partners, recognizing that ONEOK is restricted from accessing most ONEOK Partners assets and cash flows other than distributions.
- Track execution, permitting, financing, cost and completion schedules for the projected $1.55 billion of 2011 capital expenditures and the broader $2.7 billion to $3.3 billion growth program.
- Assess the impact of Energy Services’ reduced transportation and storage capacity, contract expirations and management’s expectation that weak market conditions may continue into 2012.
- Review the April 2012 maturity of $350 million of ONEOK Partners senior notes and the planned use of cash and short-term borrowings for repayment.
- Monitor credit ratings, covenant headroom, collateral triggers and derivative exposures, including the $16.3 million potential collateral requirement.
- Follow appeals and remaining claims in the gas-index pricing litigation and developments in environmental, pipeline-safety, Dodd-Frank and emissions regulation.