ONEOK, Inc. 2013 Second-Quarter Form 10-Q Summary
Business context and reporting period
ONEOK, Inc. reported unaudited results for the three and six months ended June 30, 2013. Operations comprised the consolidated ONEOK Partners midstream business, regulated natural gas distribution utilities in Oklahoma, Kansas and Texas, and the Energy Services segment. Results are seasonal and may not represent a full year.
ONEOK announced in June 2013 that it would accelerate the wind down of Energy Services and, on July 25, 2013, announced a plan to separate its Natural Gas Distribution segment into a standalone publicly traded company, ONE Gas, Inc., subject to regulatory approvals and board discretion.
Financial results and key metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue | $3.349 billion, up 32% | $6.891 billion, up 16% |
| Net margin | $453.4 million, down 17% | $1.077 billion, down 10% |
| Operating income | $128.2 million, down 45% | $402.0 million, down 28% |
| Net income | $79.5 million, down 47% | $245.2 million, down 36% |
| Net income attributable to ONEOK | $0.9 million versus $61.0 million | $113.4 million, down 38% |
| Diluted EPS | $0.00 versus $0.29 | $0.54 versus $0.80 |
| Cash provided by operating activities | Not separately provided | $788.3 million versus $652.6 million |
| Capital expenditures | $559.3 million, up 29% | $1.060 billion, up 36% |
Consolidated net margin was approximately 13.5% of revenue in the second quarter and 15.6% for the first six months, compared with approximately 21.7% and 20.1%, respectively, in the comparable 2012 periods. Operating income and earnings declined despite higher revenue because of lower commodity-related margins, narrower NGL price differentials, ethane rejection, higher depreciation and interest expense, and Energy Services wind-down charges.
At June 30, 2013, cash and cash equivalents were $33.7 million versus $583.6 million at December 31, 2012. Total assets were $15.842 billion and total equity was $4.174 billion. Consolidated long-term debt, including current maturities, was approximately $6.522 billion at book value; estimated fair value was $6.9 billion.
- ONEOK had $405.0 million of commercial paper outstanding, $1.9 million of letters of credit and approximately $793.1 million of available capacity under its $1.2 billion revolving credit agreement.
- ONEOK Partners had $429.0 million of commercial paper outstanding, no borrowings or letters of credit under its revolving credit agreement, and approximately $771.0 million of available capacity.
- ONEOK and ONEOK Partners were in compliance with their credit covenants. Stand-alone debt-to-capital ratios were 48.1% for ONEOK and 3.6 times indebtedness to adjusted EBITDA for ONEOK Partners.
- 2013 projected capital expenditures were $2.676 billion, including $2.360 billion for ONEOK Partners and $286 million for Natural Gas Distribution.
Material changes versus the prior comparable period
- Revenue increased primarily from higher natural gas and NGL volumes generated by completed ONEOK Partners growth projects, but cost of sales rose faster than revenue.
- ONEOK Partners’ second-quarter net margin increased 3% to $412.0 million, supported by exchange-services margins and Williston Basin volume growth. Six-month net margin decreased 5% to $782.6 million because narrower NGL differentials reduced optimization and marketing margins.
- Natural Gas Distribution operating income increased 87% in the second quarter to $40.6 million and 17% for the six months to $141.2 million, aided by new rates, colder weather and higher transportation volumes.
- Energy Services’ operating loss increased to $141.4 million in the second quarter and $145.8 million for the six months, primarily because of the wind-down charge and difficult market conditions.
- Operating cash flow increased $135.7 million, but investing cash use increased to $1.044 billion because of growth-project spending. Financing cash flow was an outflow of $294.6 million versus an inflow of $125.9 million in 2012, resulting in a $549.9 million decline in cash.
- ONEOK’s ownership in ONEOK Partners declined to 43.3% from 43.4% at year-end 2012 following partnership unit issuance.
- ONEOK Partners’ distribution paid per unit increased to $0.715 in the second quarter from $0.635. ONEOK declared a $0.38 quarterly dividend per share in July 2013, and ONEOK Partners declared a $0.72 per-unit distribution.
Guidance, outlook, commentary, risks and unusual items
Management expects increased North American production to support continued demand for gathering, processing, NGL transportation and fractionation infrastructure. ONEOK Partners planned approximately $4.7 billion to $5.2 billion of growth capital from 2010 through 2015, with projects intended to increase fee-based earnings and cash flow.
Ethane rejection, lower NGL prices and narrower location differentials are expected to affect ONEOK Partners materially through 2014 and, in some regions, through 2015. Management expects new supply commitments, minimum-volume agreements and use of available transportation capacity to mitigate part of the impact.
Energy Services recorded an approximately $113.8 million pretax noncash contract-termination charge in the second quarter. Additional noncash charges of approximately $40 million pretax were expected through March 31, 2014. Future after-tax cash expenditures associated with released capacity were estimated at approximately $100 million, including approximately $15 million in 2013, $35 million in 2014, $25 million in 2015 and $25 million over 2016–2023. The segment was expected to become discontinued operations after substantially all operations ceased.
Key risks include commodity-price and basis volatility, ethane rejection, producer drilling activity, project execution and permitting, leverage and credit-rating changes, regulatory and environmental costs, pipeline safety requirements, counterparty performance, and access to capital markets. ONEOK’s and ONEOK Partners’ ratings were investment grade, but ONEOK had a negative outlook and rating agencies announced reviews following the planned ONE Gas separation.
Gas Index Pricing Litigation remained unresolved. The Ninth Circuit reversed prior summary judgments in several cases and ordered proceedings stayed pending a U.S. Supreme Court certiorari matter. The company could not estimate potential exposure, and stated that future charges could be material. Texas Gas Service’s $4.9 million El Paso GRIP rate request was denied in July 2013, with an appeal expected. A potential Bighorn Gas Gathering impairment remained a risk if fair value declined by 10% or more, although no second-quarter impairment indicator was identified.
Disclosure controls and procedures were assessed as effective at June 30, 2013, with no material changes to internal control over financial reporting.
Facts investors should verify
- Whether and when the planned ONE Gas separation receives regulatory approvals and closes, and the resulting effect on ONEOK’s leverage, ratings, cash flows and distributions.
- The remaining Energy Services contract releases, additional approximately $40 million pretax charges and approximately $100 million of future after-tax cash payments.
- The effect of ethane rejection, NGL price differentials and commodity prices on ONEOK Partners’ margins, volumes and covenant ratios.
- Funding sources and completion schedules for the $2.676 billion 2013 capital program and longer-term ONEOK Partners growth projects.
- The outcome and potential exposure from Gas Index Pricing Litigation and other regulatory proceedings.
- The sustainability of ONEOK’s dividends and ONEOK Partners’ distributions relative to operating cash flow, capital expenditures and debt financing.