ONEOK, Inc. — Form 10-Q Summary
Business context and reporting period
ONEOK, Inc. is an energy company with four reportable segments: ONEOK Partners, which gathers, processes, transports, stores and markets natural gas and NGLs; regulated Distribution utilities serving more than two million customers; Energy Services, which markets natural gas and provides risk-management services; and Other. This unaudited filing covers the three and nine months ended September 30, 2009, compared with the corresponding 2008 periods. ONEOK consolidated ONEOK Partners but owned 45.1% of it at September 30, 2009.
Financial performance and key metrics
| Metric | Q3 2009 | Q3 2008 | 9M 2009 | 9M 2008 |
|---|---|---|---|---|
| Revenue | $2.365 billion | $4.239 billion | $7.382 billion | $13.314 billion |
| Net margin | $451.9 million | $455.0 million | $1.436 billion | $1.462 billion |
| Operating income | $173.8 million | $192.2 million | $621.6 million | $698.3 million |
| Net income attributable to ONEOK | $48.0 million | $58.0 million | $212.0 million | $243.7 million |
| Diluted EPS | $0.45 | $0.55 | $2.00 | $2.30 |
| Cash flow from operations | Not separately provided | Not separately provided | $1.271 billion | $478.4 million |
| Capital expenditures | $207.2 million | $393.0 million | $614.8 million | $1.033 billion |
Reported revenue declined 44% in the quarter and 45% year to date, principally reflecting lower commodity prices and lower reported volumes and values in Energy Services. Net margin declined only 1% in the quarter and 2% year to date. Approximate net-margin percentages were 19.1% in Q3 2009 versus 10.7% in Q3 2008, and 19.4% for the first nine months of 2009 versus 11.0% in the prior-year period. Operating margins were approximately 7.3% and 4.5% for the respective quarters and 8.4% and 5.2% for the respective nine-month periods.
Interest expense increased 19% in the quarter and 22% year to date, primarily because of ONEOK Partners’ March 2009 debt issuance and lower capitalized interest after projects entered service. Equity earnings from investments declined 32% in the quarter and 26% year to date, mainly because of lower Northern Border Pipeline earnings and the absence of a prior-year pipeline-sale gain.
Segment developments
- ONEOK Partners: Q3 net margin declined 10% to $292.9 million and nine-month net margin declined 8% to $808.4 million. Lower realized commodity prices and narrower NGL differentials outweighed higher volumes and transportation margins. NGL sales increased to 382 MBbl/d in the quarter from 273 MBbl/d, while realized composite NGL prices fell to $0.76 per gallon from $1.51.
- Distribution: Net margin increased 4% in the quarter to $128.5 million and 2% year to date to $502.6 million. New rate mechanisms, recovery of certain costs and lower bad-debt expense offset warmer weather and lower delivered volumes.
- Energy Services: Net margin increased to $29.7 million from $4.8 million in Q3 2008 and to $122.4 million from $93.9 million year to date. Transportation margins and premium services improved, although storage and marketing margins were affected by less favorable storage differentials and mark-to-market effects.
Cash flow, debt and liquidity
- Operating cash flow was $1.271 billion for the first nine months, up from $478.4 million, largely because of working-capital changes, lower cash collateral and margin requirements, lower commodity prices and reduced receivables. Operating cash flow before working-capital changes declined to $623.4 million from $724.3 million.
- Investing cash use was $621.6 million, including $614.8 million of capital expenditures. Financing cash use was $1.107 billion, including net repayment of notes payable, debt repayment, dividends and distributions.
- Cash and cash equivalents fell to $52.2 million at September 30, 2009, from $510.1 million at December 31, 2008. The filing also identifies approximately $21.7 million of ONEOK cash and $30.5 million of ONEOK Partners cash within their respective liquidity discussions.
- Current liabilities included $824.0 million of notes payable and $268.2 million of current long-term debt maturities. Long-term debt excluding current maturities was $4.340 billion; total long-term debt including current maturities had a $4.9 billion estimated fair value and $4.6 billion book value.
- ONEOK had $309 million of commercial paper outstanding, $42 million of letters of credit and approximately $849 million available under its $1.2 billion credit agreement. ONEOK Partners had $515 million drawn under its credit agreement and approximately $219.7 million of borrowing capacity under the most restrictive provisions.
- ONEOK and ONEOK Partners remained investment grade at Baa2/BBB, with stable outlooks. ONEOK’s stand-alone debt-to-capital ratio was 45.4%, versus a 67.5% covenant limit; ONEOK Partners’ indebtedness-to-adjusted-EBITDA ratio was 4.7 to 1, versus a 5 to 1 limit.
Material changes versus the prior comparable period
- Lower natural gas, NGL and crude oil prices materially reduced reported revenue and ONEOK Partners’ commodity-sensitive margin.
- Completed or substantially completed projects, including Overland Pass, Arbuckle, Guardian, Williston Basin and related NGL expansions, increased volumes and transportation capacity but also increased operating costs and depreciation.
- Capital expenditures fell 40% for the first nine months as major projects were completed. Management projected 2009 capital expenditures of approximately $756 million, excluding AFUDC.
- ONEOK Partners issued $500 million of 8.625% senior notes due 2019 and raised approximately $241.6 million through common-unit offerings. These proceeds were primarily used to repay credit-agreement borrowings.
- ONEOK’s quarterly dividend was increased to $0.42 per share from $0.40; ONEOK Partners declared a third-quarter distribution of $1.09 per unit, up from $1.08.
Outlook, unusual items and risks
Management expected improving economic conditions during the remainder of 2009 and into 2010, but anticipated continued financial-market volatility that could restrict access to capital or increase financing costs. The filing provides no formal consolidated earnings guidance.
- Commodity-price exposure remains significant. As of November 3, 2009, ONEOK Partners had hedged 88% of expected Q4 2009 NGL and condensate volumes and 88% of expected natural-gas volumes; 2010 hedge percentages were 60% for NGLs and condensate and 75% for natural gas.
- Derivative assets totaled $952.8 million and derivative liabilities totaled $723.6 million at September 30, 2009. Value-at-risk was $8.2 million at that date. A credit downgrade below investment grade could require approximately $11.8 million of additional collateral and could trigger repurchase obligations on certain ONEOK Partners notes.
- Q3 2009 included a $1.2 million loss on asset sales. The first nine months included an $11.3 million lower-of-cost-or-market inventory adjustment related to natural gas in storage and associated hedge accounting.
- No goodwill or indefinite-lived intangible impairment was recorded in the July 1, 2009 test. The filing states that environmental spending and ordinary-course litigation had not materially affected results, but identifies ongoing environmental, regulatory, pipeline-safety, commodity, counterparty, construction and legal risks.
- Pending matters included proposed regulatory rate settlements, a proposed $160,000 Mont Belvieu emissions settlement, gas measurement litigation and gas-index-pricing litigation. Outcomes remain uncertain, although management did not expect ordinary-course litigation to have a material adverse effect.
Important facts for investors to verify
- Whether lower commodity prices and NGL differentials continue to offset volume growth and newly commissioned infrastructure.
- ONEOK Partners’ leverage, refinancing needs, distribution coverage and the effect of ONEOK’s reduced ownership interest.
- Liquidity after the decline in consolidated cash, available credit, commercial-paper access and potential collateral requirements under rating triggers.
- Actual throughput and contracted capacity for Overland Pass, Arbuckle, Guardian and related projects versus management’s forecasts.
- Resolution and financial impact of regulatory proceedings, environmental matters, gas-measurement claims and gas-index-pricing litigation.
- The sustainability of Distribution rate mechanisms and the effect of weather-normalization provisions on future margins.
- The filing’s stated seasonal nature: interim results are not necessarily indicative of full-year performance.