ONEOK, Inc. 2013 Form 10-K Summary
Business context and reporting period
ONEOK filed its annual report for the fiscal year ended December 31, 2013. The company operated through three reportable segments: ONEOK Partners, Natural Gas Distribution and Energy Services. ONEOK controlled ONEOK Partners and owned a 41.2% economic interest at year-end. ONEOK Partners gathered, processed, transported, stored and marketed natural gas and natural gas liquids.
After year-end, ONEOK completed the separation of its regulated natural gas distribution business into ONE Gas on January 31, 2014, and planned to substantially complete the wind-down of Energy Services by March 31, 2014. Future ONEOK cash flows are expected to depend primarily on distributions from ONEOK Partners.
Financial performance and key metrics
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Revenue | $14.603 billion | $12.633 billion | +16% |
| Net margin | $2.290 billion | $2.351 billion | -3% |
| Operating income | $926.7 million | $1.103 billion | -16% |
| Income from continuing operations | $577.0 million | $729.3 million | -21% |
| Net income attributable to ONEOK | $266.5 million | $360.6 million | -26% |
| Diluted EPS from continuing operations | $1.27 | $1.64 | -23% |
| Operating cash flow | $1.295 billion | $984.0 million | +32% |
| Capital expenditures | $2.257 billion | $1.866 billion | +21% |
- Consolidated net margin was approximately 15.7% of revenue, while operating income was approximately 6.3% of revenue.
- ONEOK Partners revenue increased 17% to $11.869 billion, but operating income declined 6% to $900.7 million. Higher volumes from growth projects were largely offset by lower commodity prices, narrower NGL differentials and ethane rejection.
- Natural Gas Distribution operating income increased 4% to $223.4 million, supported by new rates and colder weather.
- Energy Services generated an operating loss of $186.4 million, compared with a $77.9 million loss in 2012. The segment recorded approximately $138.6 million of noncash charges related to released transportation and storage contracts.
- Cash and cash equivalents were $149.3 million at December 31, 2013, compared with $583.6 million at the prior year-end.
- Consolidated long-term debt, including current maturities, was $7.766 billion, compared with $6.526 billion in 2012. ONEOK alone had approximately $1.7 billion of borrowed debt, excluding ONEOK Partners.
- ONEOK paid dividends of $1.48 per share in 2013, up approximately 17% from $1.27 in 2012. A January 2014 dividend of $0.40 per share was declared, equivalent to $1.60 annually.
Material changes versus the prior comparable period
- Revenue growth reflected higher natural gas and NGL volumes from completed projects, partially offset by lower realized prices and ethane rejection.
- Profitability declined despite higher revenue because of Energy Services exit charges, higher operating costs and depreciation, lower NGL optimization margins, reduced equity earnings and increased interest expense.
- ONEOK Partners’ NGL fractionation volumes declined to 535 MBbl/d from 574 MBbl/d, primarily because of ethane rejection. Natural gas gathered increased to 1,347 BBtu/d from 1,119 BBtu/d.
- ONEOK Partners completed the $305 million Sage Creek acquisition in Wyoming and acquired the remaining 30% interest in its Maysville processing facility for $90 million.
- ONEOK Partners issued $1.25 billion of senior notes and raised approximately $553.3 million through a common-unit offering. ONEOK’s ownership declined to 41.2% from 43.4%.
- Capital spending increased substantially as ONEOK Partners expanded gathering, processing, fractionation and NGL transportation infrastructure.
Guidance, outlook, risks and unusual items
- ONEOK Partners expected to invest approximately $6.0 billion to $6.4 billion in growth projects and acquisitions from 2010 through 2016. Projected 2014 capital expenditures were $2.040 billion, including $2.024 billion for ONEOK Partners.
- Management expected ethane rejection to persist through much of 2016, with a significant effect on ONEOK Partners’ NGL volumes and financial results. New supply commitments and minimum-volume arrangements were expected to mitigate part of the impact.
- Management expected narrower NGL location differentials to persist, although colder weather produced higher propane prices and wider Conway-to-Mont Belvieu differentials late in 2013.
- Following the ONE Gas separation, ONEOK received approximately $1.13 billion and used the proceeds to repay approximately $600.5 million of commercial paper and retire or call approximately $550 million of long-term debt. ONEOK expected no principal debt-service requirements after the first quarter of 2014 until its next long-term maturity in 2022.
- ONEOK’s credit facility was reduced to $300 million from $1.2 billion, while ONEOK Partners’ revolving facility increased to $1.7 billion from $1.2 billion. ONEOK Partners reported a debt-to-adjusted-EBITDA ratio of 4.0 to 1 and was in compliance with its covenants.
- ONEOK’s ratings were downgraded in February 2014 to Baa3 by Moody’s and BB+ by S&P following the ONE Gas separation. ONEOK Partners retained investment-grade ratings of Baa2 and BBB, both with stable outlooks.
- Gas Index Pricing Litigation remains a material uncertainty. The company stated that potential exposure could not be reasonably estimated and that future charges could be material.
- Other key risks include commodity-price and basis risk, ethane rejection, producer drilling declines, project execution and financing risk, regulatory and environmental requirements, pipeline integrity, cyber security, counterparty credit risk and potential impairment of Powder River Basin assets or investments.
- The independent auditor reported an unqualified opinion and concluded that internal control over financial reporting was effective as of December 31, 2013.
Important facts for investors to verify
- Assess post-separation ONEOK results on a standalone basis, excluding the former Natural Gas Distribution business and substantially exited Energy Services operations.
- Track distributions from ONEOK Partners, including incentive distribution rights, because they are expected to become ONEOK’s primary cash source.
- Evaluate ONEOK Partners’ leverage, financing needs and ability to fund its growth program while maintaining investment-grade ratings.
- Monitor ethane rejection, NGL volumes, commodity prices and Conway-to-Mont Belvieu differentials through 2016.
- Review the final cash costs of the Energy Services wind-down and the status and potential exposure of the Gas Index Pricing Litigation.
- Verify the effect of the ONE Gas separation, debt repayments, credit-rating changes and related tax matters on future liquidity and dividend capacity.