ONEOK, Inc. — Form 10-Q Summary
Business context and reporting period
Reports results for the three months ended March 31, 2015. ONEOK consolidates ONEOK Partners, in which it held a 37.6% aggregate ownership interest at quarter-end. ONEOK Partners operates Natural Gas Gathering and Processing, Natural Gas Liquids, and Natural Gas Pipelines businesses. ONEOK’s former natural gas distribution and energy services businesses are reported as discontinued operations.
Key financial metrics
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Total revenues | $1.805 billion | $3.163 billion | Down 43% |
| Net margin | $461.4 million | $510.6 million | Down 10% |
| Operating income | $196.5 million | $294.1 million | Down 33% |
| Income from continuing operations | $95.8 million | $204.7 million | Down 53% |
| Net income attributable to ONEOK | $60.8 million | $93.5 million | Down 35% |
| Diluted EPS | $0.29 | $0.45 | Down $0.16 |
| Cash provided by operating activities | $39.3 million | $490.4 million | Down $451.1 million |
| Capital expenditures | $343.8 million | $429.5 million | Down 20% |
Commodity sales declined 49%, while services revenue increased 4%. The net-margin-to-revenue ratio was approximately 25.6%, compared with 16.1% in the prior-year quarter; operating margin was approximately 10.9%, compared with 9.3%. The filing does not provide a comparable consolidated EBITDA value.
Cash and cash equivalents were $239.4 million at March 31, 2015, compared with $172.8 million at December 31, 2014. Total assets were $15.53 billion. Book long-term debt, including current maturities, was approximately $8.0 billion, compared with $7.2 billion at year-end 2014; estimated fair value was $8.3 billion. Current maturities of long-term debt were $660.7 million, and commercial paper outstanding was $825.5 million.
ONEOK generated $39.3 million of operating cash flow, used $333.8 million in investing activities, and received $360.9 million from financing activities. Financing included approximately $798.9 million of net long-term debt issuance, partly offset by a $229.8 million net repayment of notes payable, $126.1 million of dividends, and $129.5 million of distributions to noncontrolling interests.
Material changes versus the prior comparable period
- Lower oil, natural gas, and NGL prices drove the sharp decline in commodity sales and reduced consolidated earnings. Q1 2014 benefited from unusually cold weather, elevated propane demand, and wider NGL location differentials.
- Operating costs increased 20% to $179.0 million and depreciation and amortization increased 27% to $86.0 million, primarily because of completed projects and acquisitions.
- Natural Gas Gathering and Processing operating income fell 67% to $19.7 million, despite higher gathered and processed volumes, as lower realized NGL and condensate prices outweighed volume and fee growth.
- Natural Gas Liquids operating income fell 18% to $145.7 million. Higher exchange-service and transportation margins, including benefits from the West Texas LPG acquisition, were offset by narrower location and product differentials, ethane rejection, and weaker optimization margins.
- Natural Gas Pipelines operating income fell 44% to $31.1 million, primarily because of lower storage, park-and-loan, retained-fuel, and other seasonal revenues compared with the unusually strong Q1 2014 environment.
- ONEOK Partners issued $800 million of senior notes in March 2015, consisting of $300 million due 2020 at 3.8% and $500 million due 2025 at 4.9%. Net proceeds were approximately $792.3 million and were used primarily to repay commercial paper and for general partnership purposes.
- ONEOK Partners increased its revolving credit facility and commercial paper program from $1.7 billion to $2.4 billion. It also issued approximately 1.7 million common units for net proceeds of approximately $71.6 million, reducing ONEOK’s ownership interest from 37.8% to 37.6%.
- ONEOK Partners settled $500 million of forward-starting interest-rate swaps upon the debt issuance, paying $55.1 million. Remaining swap notional was $400 million at quarter-end.
Guidance, outlook, risks and unusual items
- Management expects depressed commodity prices to continue through the remainder of 2015, with adverse effects on volumes, margins, earnings, and cash flow. Management specifically cited WTI below $50 per barrel, natural gas below $3 per MMBtu, and average Conway propane below $0.50 per gallon during the quarter.
- Ethane rejection is expected to continue affecting results through 2017. Narrow NGL location differentials are also expected to persist, although integrated assets and minimum-volume commitments may partially mitigate the impact.
- ONEOK Partners expects 2015 capital expenditures of approximately $1.227 billion, excluding acquisitions, equity-method contributions, and AFUDC. Certain processing and NGL infrastructure projects have been suspended or reduced in response to lower producer activity.
- ONEOK Partners expects approximately $50 million of equity contributions in 2015 for the Roadrunner Gas Transmission joint venture. The project’s estimated total cost is $450 million to $500 million and is expected to be developed in phases through 2019.
- ONEOK expects its distributions from ONEOK Partners to fund operations and quarterly dividends; it reported no short-term debt and approximately $298.2 million of availability under its $300 million revolving credit facility. ONEOK’s debt-to-Consolidated EBITDA ratio was 2.2x and it was in compliance with covenants.
- ONEOK Partners had approximately $90.5 million of cash, $825.5 million of commercial paper, approximately $1.6 billion of available revolving credit, and a 4.5x debt-to-adjusted-EBITDA ratio. The applicable covenant limit was temporarily 5.5x through the second quarter of 2015 because of the West Texas LPG acquisition.
- ONEOK Partners’ $650 million of 3.25% senior notes mature February 1, 2016; management expects to refinance this debt.
- Future after-tax cash payments related to released transportation and storage contracts from the discontinued energy services business are estimated at approximately $37 million, including $15 million during the remainder of 2015.
- Gas Index Pricing Litigation was remanded for further proceedings after the U.S. Supreme Court affirmed the Ninth Circuit on April 21, 2015. ONEOK cannot reasonably estimate potential exposure, but states that future charges could be material.
- Environmental, pipeline-safety, permitting, regulatory, counterparty-credit, financing, commodity-price, producer-drilling, project-execution, and potential impairment risks remain material. Management identified $215.3 million of equity-method investments in the Powder River Basin dry-gas area, including $130.5 million of equity-method goodwill, that could be exposed to noncash impairment charges if volumes continue to decline.
Important facts for investors to verify
- Whether lower commodity prices and producer capital spending reductions continue to pressure gathering and processing volumes and margins.
- The timing, cost, and demand support for suspended and ongoing growth projects, including the $1.227 billion 2015 capital program.
- ONEOK Partners’ ability to refinance the $650 million February 2016 maturity while maintaining investment-grade ratings and covenant compliance.
- The sustainability of cash distributions from ONEOK Partners relative to ONEOK’s dividend and corporate funding needs.
- Progress and potential exposure in the Gas Index Pricing Litigation and any related reserves or charges.
- Potential impairment of Powder River Basin equity-method investments and the effect of ethane rejection through 2017.
- ONEOK Partners’ exposure to narrower NGL differentials, counterparty defaults, collateral requirements, regulatory changes, and environmental or pipeline-safety costs.