ONEOK INC quarterly report, Q2 FY2009

ONEOK, Inc. 10-Q Summary

Business context and reporting period

ONEOK, Inc. reported unaudited consolidated results for the three and six months ended June 30, 2009, compared with the corresponding 2008 periods. The company operates through ONEOK Partners, Distribution, Energy Services and Other. ONEOK consolidated ONEOK Partners and owned approximately 45.3% at June 30, 2009; its ownership declined to 45.1% after subsequent July unit issuance. Results are seasonal and are not necessarily indicative of full-year performance.

Key financial metrics

Metric	Three months ended June 30, 2009	Three months ended June 30, 2008	Six months ended June 30, 2009	Six months ended June 30, 2008
Revenue	$2.228 billion	$4.173 billion	$5.017 billion	$9.075 billion
Net margin	$432.4 million	$420.8 million	$983.8 million	$1.007 billion
Operating income	$154.8 million	$173.0 million	$447.8 million	$506.1 million
Net income	$81.4 million	$113.0 million	$244.9 million	$325.8 million
Net income attributable to ONEOK	$41.7 million	$41.9 million	$164.0 million	$185.7 million
Diluted EPS	$0.39	$0.39	$1.55	$1.75
Cash provided by operating activities	Not separately provided	Not separately provided	$1.076 billion	$534.8 million
Capital expenditures	$164.6 million	$300.5 million	$407.6 million	$640.0 million

Calculated consolidated net-margin percentages were approximately 19.4% for the quarter and 19.6% for the six-month period. Operating margins were approximately 7.0% and 8.9%, respectively. These percentages are calculated from reported figures and are not company-defined performance measures.

At June 30, 2009, cash and cash equivalents were $47.0 million, compared with $510.1 million at December 31, 2008.
Total assets were $11.834 billion, compared with $13.126 billion at year-end 2008.
Current maturities of long-term debt were $268.2 million; long-term debt excluding current maturities was $4.346 billion. Notes payable were $689.9 million.
ONEOK had $329.9 million of commercial paper outstanding and approximately $822.1 million available under its $1.2 billion credit agreement. The additional $400 million 364-day facility expired on August 5, 2009.
ONEOK Partners had $360.0 million of borrowings and $586.5 million of available credit under its revolving credit agreement.
ONEOK’s stand-alone debt-to-capital ratio was 45.7%, against a 67.5% covenant maximum. ONEOK Partners’ indebtedness-to-adjusted-EBITDA ratio was 4.3-to-1, against a 5-to-1 maximum. Both entities were in compliance with applicable covenants at June 30, 2009.
Declared common-stock dividends were $0.40 per share in each of the first two quarters; a $0.42 per-share second-quarter dividend was declared in July 2009.

Material changes versus the prior comparable period

Second-quarter revenue declined 47% and six-month revenue declined 45%, primarily reflecting significantly lower commodity prices and lower average natural gas sales prices.
Second-quarter operating income decreased 11% to $154.8 million; six-month operating income decreased 12% to $447.8 million.
Second-quarter net margin increased 3% despite lower commodity prices, supported by higher NGL throughput, incremental Guardian Pipeline transportation margins, improved Energy Services transportation margins and new Distribution rate mechanisms. Six-month net margin declined 2%.
ONEOK Partners’ second-quarter operating income declined 24% to $124.8 million, while Energy Services operating income improved to $19.4 million from a $4.4 million loss. Distribution operating income declined 17% for the quarter but increased 2% for the six-month period.
Interest expense increased 24% in both the quarter and six-month period, primarily because of higher ONEOK Partners borrowings used to fund capital projects.
Operating cash flow more than doubled year over year, principally because of lower working-capital requirements, reduced collateral and margin requirements, lower commodity prices and changes in receivables and inventory.
Capital expenditures declined 45% in the quarter and 36% for the six-month period, reflecting completion of major projects including Overland Pass, the Williston Basin expansion and the Guardian Pipeline expansion.

Guidance, outlook, risks and unusual items

Management expected challenging economic conditions, lower commodity prices, reduced drilling activity and weaker NGL demand from the petrochemical industry to persist through the remainder of 2009 and into 2010.
Projected 2009 capital expenditures were $745 million, comprising $570 million for ONEOK Partners, $158 million for Distribution and $17 million for Other.
Management expected access to operating cash flow, existing credit resources and capital markets to support operations, collateral requirements and planned capital expenditures, but warned that financial-market volatility could restrict access or increase financing costs.
ONEOK Partners issued $500 million of 8.625% senior notes due 2019 and raised approximately $219.9 million from a June common-unit offering. Proceeds were used primarily to repay revolving-credit borrowings.
Major projects placed in service included the Guardian Pipeline expansion and extension, the D-J Basin lateral and the Williston Basin processing-plant expansion. The Arbuckle NGL pipeline was completed in July 2009 and was expected to enter service in August 2009; estimated project cost was approximately $490 million, excluding AFUDC.
ONEOK Partners expected to contribute approximately $38 million to Northern Border Pipeline in the third quarter of 2009.
Derivative assets totaled $997.5 million and derivative liabilities totaled $733.1 million before balance-sheet netting at June 30, 2009. The company reported value-at-risk of $6.9 million at quarter-end.
A six-month $11.3 million lower-of-cost-or-market inventory adjustment was recorded in cost of sales and fuel, with associated deferred hedge gains reclassified into earnings.
Risks include commodity-price volatility, weather, counterparty and collateral exposure, leverage and refinancing, access to capital markets, regulatory recovery, project execution, environmental compliance, pipeline integrity, litigation and potential impairment charges.
Environmental matters include remediation responsibilities at 12 former manufactured-gas sites and a TCEQ enforcement matter relating to emissions at the Mont Belvieu fractionator. The filing states that environmental expenditures had not been material through June 30, 2009.
The company disclosed ongoing gas-index-pricing litigation and stated that it believed pending litigation would not materially affect consolidated results, financial position or liquidity, although outcomes cannot be predicted with certainty.
Management’s evaluation concluded that disclosure controls were effective as of June 30, 2009, and reported no material changes in internal control over financial reporting during the quarter.

Most important facts for investors to verify

Whether lower commodity prices, drilling activity and NGL demand continue to pressure ONEOK Partners’ gathering, processing and NGL margins.
Liquidity after expiration of the $400 million 364-day facility, including commercial-paper availability, credit-market access and collateral requirements.
Debt maturities, refinancing needs and compliance with ONEOK and ONEOK Partners credit covenants.
Actual throughput, contracted capacity and returns from Overland Pass, Arbuckle, Guardian, D-J Basin and other completed or developing projects.
Disposition of the Oklahoma rate case, Texas rate proceedings and other regulatory mechanisms supporting Distribution margins.
Potential effects of environmental enforcement, site remediation, pipeline-safety requirements and gas-index-pricing litigation.
Whether the July 2009 goodwill impairment test, which was still pending at the reporting date, resulted in any impairment charge.
The extent to which reported operating cash flow benefited from temporary working-capital and collateral movements rather than recurring earnings growth.