ONEOK, Inc. 2014 Q3 Form 10-Q Summary
Business context and reporting period
Reporting period ended September 30, 2014; filed November 5, 2014. Following the January 31, 2014 separation of ONE Gas and the March 31, 2014 wind-down of the energy services business, ONEOK’s continuing operations are primarily its 38.3% ownership interest in ONEOK Partners, which operates natural gas gathering and processing, natural gas liquids, and natural gas pipelines businesses. Former businesses are presented as discontinued operations.
Key financial metrics
| Metric | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Total revenue | $3.120 billion | $3.135 billion | $9.350 billion | $8.422 billion |
| Net margin | $536.9 million | $424.2 million | $1.543 billion | $1.208 billion |
| Operating income | $291.4 million | $231.4 million | $836.8 million | $634.5 million |
| Income from continuing operations | $114.5 million | $157.8 million | $467.9 million | $422.1 million |
| Net income attributable to ONEOK | $64.5 million | $62.4 million | $219.6 million | $175.8 million |
| Diluted EPS | $0.31 | $0.30 | $1.04 | $0.84 |
| Operating cash flow | Not separately provided | Not separately provided | $870.5 million | $1.022 billion |
| Capital expenditures | $382.2 million | $537.5 million | $1.204 billion | $1.598 billion |
Q3 net margin was approximately 17.2% of revenue, operating margin was approximately 9.3%, and net income attributable to ONEOK margin was approximately 2.1%. For the nine-month period, the corresponding margins were approximately 16.5%, 9.0%, and 2.3%.
- Cash and cash equivalents were $151.4 million at September 30, 2014, compared with $145.6 million at year-end 2013. Management separately reported approximately $97.4 million at ONEOK and $54.0 million at ONEOK Partners.
- Consolidated long-term debt, including current maturities, was approximately $7.2 billion at September 30, 2014, versus $7.8 billion at December 31, 2013; estimated fair value was $7.9 billion.
- ONEOK had approximately $297.9 million available under its $300 million revolving credit facility. ONEOK Partners had approximately $1.7 billion available under its revolving facility. Neither entity had borrowings outstanding under its respective facility at September 30, 2014.
- ONEOK’s indebtedness-to-EBITDA ratio was 1.9-to-1, and ONEOK Partners’ indebtedness-to-adjusted-EBITDA ratio was 3.4-to-1; both were in compliance with applicable covenants.
- ONEOK declared quarterly dividends of $0.575 per share during Q3 and declared $0.59 per share for payment in November 2014. ONEOK Partners declared a third-quarter distribution of $0.775 per unit.
Material changes versus the prior comparable period
- Q3 revenue declined slightly, by $15.3 million, but net margin increased 27% and operating income increased 26%, primarily from higher volumes and fees associated with completed growth projects.
- Nine-month revenue increased 11%, net margin increased 28%, and operating income increased 32%, reflecting higher natural gas and NGL volumes, increased optimization activity, higher transportation rates and seasonal propane demand.
- Q3 net income attributable to ONEOK rose 3%, while continuing-operations income fell 27%, principally because of the $76.4 million noncash impairment related to the Bighorn Gas Gathering equity investment, higher interest expense, and related changes in noncontrolling interests.
- Interest expense increased 30% in Q3 and 37% for nine months, primarily because of ONEOK Partners’ $1.25 billion debt issuance in September 2013. Early debt retirements partially offset the increase.
- Operating cash flow declined $151.0 million for nine months, largely because the prior-year period included the former natural gas distribution business and because of working-capital changes and payments related to the energy services wind-down.
- Capital expenditures declined 25% for nine months, primarily because of project timing and the ONE Gas separation; prior-year spending included the former natural gas distribution business.
- ONEOK Partners’ ownership dilution reduced ONEOK’s aggregate ownership interest from 41.2% at December 31, 2013 to 38.3% at September 30, 2014, following common-unit issuances.
Guidance, outlook, commentary, risks and unusual items
- Management projected 2014 capital expenditures of approximately $1.725 billion for ONEOK Partners, excluding acquisitions and AFUDC: $919 million in Natural Gas Gathering and Processing, $716 million in Natural Gas Liquids, $71 million in Natural Gas Pipelines, and $19 million in other spending.
- ONEOK Partners expected total growth-project and acquisition investment of approximately $8.3 billion to $9.0 billion from 2010 through 2016. Management continued to expect producer development and demand for midstream infrastructure to support long-term fee-based growth.
- Management expected lower commodity prices through 2015, continued ethane rejection at least through 2016, and narrower NGL location differentials. These conditions may pressure NGL volumes, optimization margins and commodity-sensitive earnings, although new supply commitments and fee-based projects are expected to mitigate the impact.
- In October 2014, ONEOK Partners agreed to acquire an 80% interest in West Texas LPG and 100% of the Mesquite Pipeline for approximately $800 million, subject to customary closing conditions and FTC antitrust clearance. The transaction was expected to close in Q4 2014 and may be financed with cash, commercial paper or revolver borrowings.
- The Bighorn impairment reduced the remaining carrying value of that equity investment to $8.8 million. Continued Powder River Basin volume declines could result in additional noncash impairment charges.
- Future after-tax cash payments related to released energy-services capacity contracts were estimated at approximately $53 million: $8 million during the remainder of 2014, $23 million in 2015, $11 million in 2016, and $11 million thereafter through 2023.
- ONEOK and its subsidiary remain defendants in gas index pricing litigation. The Supreme Court had accepted review, with a decision expected by mid-2015. The filing states that potential exposure cannot be reasonably estimated and that future charges could be material.
- Key operating risks include commodity-price volatility, ethane rejection, producer drilling and volume declines, project execution and cost overruns, interest rates, access to capital markets, credit ratings, counterparty performance, environmental and pipeline-safety regulation, litigation, and possible impairment charges.
- ONEOK’s credit ratings were Baa3/Stable at Moody’s and BB+/Stable at S&P; ONEOK Partners’ ratings were Baa2/Stable and BBB/Stable, respectively. ONEOK’s ratings were downgraded in February 2014 following the ONE Gas separation.
Most important facts for investors to verify
- Whether projected growth projects and the West Texas LPG/Mesquite acquisition are completed on schedule and within budget.
- The sustainability of distributions from ONEOK Partners after ownership dilution and continued high capital requirements.
- The effect of ethane rejection, narrower NGL differentials and lower commodity prices on future net margin and cash flow.
- Whether Powder River Basin volume declines cause further Bighorn or other asset impairments.
- The outcome and potential financial exposure from gas index pricing litigation.
- ONEOK Partners’ ability to fund capital spending while maintaining investment-grade ratings and covenant compliance.
- The comparability of future results, given the ONE Gas separation and energy services wind-down, and the extent to which discontinued operations and separation-related items affect reported trends.