Business Context and Reporting Period
ONEOK, Inc. filed this Form 10-K for the fiscal year ended December 31, 2014, including fourth-quarter results. Following the January 31, 2014 separation of its natural-gas distribution business into ONE Gas and the March 31, 2014 wind-down of its energy-services business, ONEOK’s continuing operations primarily reflect its ownership and control of ONEOK Partners, L.P. ONEOK owned 37.8% of ONEOK Partners at year-end and reports three segments: Natural Gas Gathering and Processing, Natural Gas Liquids, and Natural Gas Pipelines.
Key Financial Metrics
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Total revenue | $12.195 billion | $11.872 billion | Up 3% |
| Net margin | $2.107 billion | $1.650 billion | Up 28% |
| Operating income | $1.144 billion | $881 million | Up 30% |
| Income from continuing operations | $669 million | $589 million | Up 14% |
| Net income attributable to ONEOK | $314 million | $267 million | Up 18% |
| Diluted EPS from continuing operations | $1.52 | $1.33 | Up 14% |
| Diluted total EPS | $1.49 | $1.27 | Up 17% |
| Cash flow from operating activities | $1.286 billion | $1.295 billion | Down 1% |
| Capital expenditures | $1.779 billion | $2.257 billion | Down 21% |
| Long-term debt, including current maturities | $7.204 billion | $7.764 billion | Down 7% |
Consolidated net margin was approximately 17.3% of revenue and operating income was approximately 9.4% of revenue. Cash and cash equivalents were $172.8 million at December 31, 2014. ONEOK had approximately $130.3 million of cash, no short-term debt, and approximately $298.1 million of available capacity under its $300 million revolving credit facility. ONEOK’s debt-to-Consolidated EBITDA ratio was 2.3x.
ONEOK Partners had approximately $7.1 billion of total indebtedness, $1.1 billion of commercial paper outstanding, approximately $42.5 million of cash, and approximately $630.7 million of available capacity under its $1.7 billion credit facility at year-end. Its debt-to-adjusted-EBITDA ratio was 3.7x, versus a covenant limit of 5.0x, temporarily increased to 5.5x through the second quarter of 2015 following the West Texas LPG acquisition.
ONEOK paid $2.125 per share in dividends during 2014, up approximately 44% from 2013. In January 2015, it declared a quarterly dividend of $0.605 per share, or $2.42 annualized. ONEOK Partners paid $3.01 per unit in 2014 distributions, up approximately 5% from 2013.
Fourth-quarter 2014 revenue was $2.845 billion, net margin was $563.5 million, income from continuing operations was $200.8 million, net income attributable to ONEOK was $94.5 million, and diluted EPS was $0.45.
Material Changes Versus the Prior Comparable Period
- Higher volumes from completed gathering, processing, fractionation and pipeline projects increased consolidated net margin and operating income. Natural Gas Gathering and Processing operating income increased 38% to $280.6 million; Natural Gas Liquids operating income increased 26% to $689.0 million; and Natural Gas Pipelines operating income increased 19% to $181.0 million.
- Natural Gas Liquids results benefited from higher exchange-services, transportation, optimization, marketing and isomerization margins, including favorable propane-related market conditions in the first quarter. These gains were partly offset by continued ethane rejection and lower NGL volumes.
- ONEOK Partners completed the approximately $800 million West Texas LPG acquisition in November 2014, adding approximately 2,600 miles of NGL gathering pipelines and approximately 285,000 barrels per day of capacity.
- ONEOK Partners issued approximately 21.8 million common units during 2014, generating approximately $1.1 billion of net proceeds. ONEOK’s ownership declined from 41.2% to 37.8%.
- Equity earnings declined by $69.5 million to $41.0 million, primarily because of a $76.4 million noncash impairment charge related to the Bighorn Gas Gathering equity investment.
- ONEOK received approximately $1.13 billion from ONE Gas in connection with the separation and used the proceeds to repay commercial paper and retire approximately $552.5 million of long-term debt. It recorded a $24.8 million loss on debt extinguishment and reclassified approximately $7.7 million of hedge losses to interest expense.
- Discontinued operations produced a $5.6 million net loss in 2014, including approximately $23.0 million of after-tax ONE Gas separation costs and additional energy-services wind-down charges.
Outlook, Commentary, Risks and Unusual Items
Management expected lower crude oil, natural gas and NGL prices and narrower NGL location differentials to persist through 2015. WTI crude oil fell below $50 per barrel in early 2015 from approximately $90 in September 2014, while NYMEX natural gas declined to approximately $3.00 per MMBtu from more than $4.00.
- Lower commodity prices are expected to reduce producer drilling and slow supply growth, adversely affecting volumes, margins, earnings and cash flows, particularly in the commodity-sensitive Natural Gas Gathering and Processing segment.
- Ethane rejection is expected to continue to materially affect NGL volumes and financial results through 2017, until new ethylene capacity is expected to increase ethane demand.
- ONEOK Partners suspended selected growth projects and projected 2015 capital expenditures of approximately $1.227 billion, excluding acquisitions and allowance for funds used during construction. Suspended projects may resume if market conditions improve.
- As of February 2015, ONEOK Partners had hedged approximately 80% of expected 2015 equity natural-gas volumes, 33% of NGL volumes and 44% of condensate volumes. It had no hedges in place for expected equity volumes beyond 2015.
- ONEOK’s primary cash-flow source is distributions from ONEOK Partners, creating dependence on the partnership’s operating performance, capital-market access and ability to maintain distributions.
- Material risks include commodity-price volatility, producer volume declines, ethane rejection, competition, leverage and refinancing, regulatory rate proceedings, environmental and pipeline-safety requirements, operational incidents, counterparty credit risk, cybersecurity, potential impairments and access to capital markets.
- Gas Index Pricing Litigation remains unresolved. The company cannot reasonably estimate potential exposure, but states that the ultimate resolution could result in future charges that may be material.
- The filing states that management and the independent auditor concluded internal control over financial reporting was effective as of December 31, 2014.
Investor Verification Priorities
- Verify the sustainability of ONEOK Partners’ distributions and the effect of ONEOK’s reduced 37.8% ownership on future cash inflows.
- Reconcile ONEOK-only debt and liquidity with consolidated debt and ONEOK Partners’ commercial-paper obligations.
- Assess sensitivity to crude oil, natural gas and NGL prices, including the disclosed approximate annual net-margin sensitivity of $5.2 million for each $0.10/MMBtu change in natural gas, $3.0 million for each $0.01/gallon change in composite NGL prices, and $1.6 million for each $1/barrel change in crude oil.
- Monitor ethane rejection, producer drilling activity, system volumes and the timing of suspended growth projects.
- Evaluate the integration and cash-flow contribution of the West Texas LPG acquisition and the potential for additional Bighorn or other equity-method impairments.
- Review the outcome of the Gas Index Pricing Litigation and the financial effect of any judgment or settlement.
- Confirm compliance with debt covenants, the proposed increase of ONEOK Partners’ credit facility to $2.4 billion, credit ratings and upcoming ONEOK Partners maturities beginning in 2016.