ONEOK, Inc. Form 10-Q Summary
Reporting period: Three months ended March 31, 2017; filed May 3, 2017. ONEOK consolidates ONEOK Partners, in which it held a 41.2% economic ownership interest at quarter-end. The principal businesses are Natural Gas Gathering and Processing, Natural Gas Liquids, and Natural Gas Pipelines.
Financial Performance and Position
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Total revenues | $2.750 billion | $1.774 billion | +55% |
| Operating income | $314.4 million | $311.4 million | +1% |
| Net income | $186.2 million | $175.0 million | +6% |
| Net income attributable to ONEOK | $87.4 million | $83.4 million | +5% |
| Diluted EPS | $0.41 | $0.40 | +3% |
| Adjusted EBITDA | $459.6 million | $441.6 million | +4% |
| Operating cash flow | $269.1 million | $230.7 million | +17% |
| Capital expenditures | $112.7 million | $196.4 million | -43% |
Commodity sales increased 73% to $2.217 billion, while service revenue increased 9% to $532.9 million. The substantial revenue increase was largely offset by a 79% increase in cost of sales and fuel. Operating margin was approximately 11.4%, compared with 17.6% in the prior-year quarter; adjusted EBITDA margin was approximately 16.7%, compared with 24.9%. These margin comparisons were significantly affected by commodity sales and related pass-through costs.
Equity earnings from investments increased 20% to $39.6 million, primarily due to higher firm transportation revenue at Roadrunner. Interest expense declined slightly to $116.5 million. The company declared a quarterly common-stock dividend of $0.615 per share, unchanged from Q1 2016.
Cash and cash equivalents were $310.8 million at March 31, 2017, versus $248.9 million at December 31, 2016. Operating cash flow of $269.1 million funded $109.5 million of investing cash uses and $97.7 million of financing cash uses, resulting in a $61.9 million increase in cash.
Total debt was $9.668 billion, including $1.291 billion of commercial paper, $410.7 million of current maturities, and $7.920 billion of long-term debt excluding current maturities. Estimated fair value of consolidated long-term debt was $8.9 billion versus a $8.3 billion book value. ONEOK’s debt-to-EBITDA covenant ratio was 2.2x and ONEOK Partners’ was 4.2x; both entities were in compliance with their covenants.
ONEOK had approximately $302.3 million of cash, no borrowings under its $300 million revolving facility, and approximately $298.9 million of available borrowing capacity, net of letters of credit. ONEOK Partners had approximately $1.3 billion of commercial paper outstanding, approximately $1.1 billion of available borrowing capacity under its $2.4 billion revolving facility, and approximately $8.5 million of cash. ONEOK Partners had a $1.6 billion working-capital deficit, driven primarily by debt maturities and short-term borrowings.
Material Changes Versus Q1 2016
- Adjusted EBITDA increased $18.0 million, reflecting higher gathering and processing fees, increased pipeline transportation services, and improved NGL optimization and marketing activity.
- Natural Gas Gathering and Processing adjusted EBITDA increased 4% to $104.0 million, primarily from contract restructuring and higher average fees, partly offset by severe winter weather and lower volumes in the Williston Basin.
- Natural Gas Liquids adjusted EBITDA increased 3% to $278.2 million, supported by wider location differentials, increased volumes, new plant connections, and higher ethane recovery.
- Natural Gas Pipelines adjusted EBITDA increased 12% to $83.0 million, primarily from higher firm demand-charge transportation revenue and increased Roadrunner equity earnings.
- Capital expenditures declined because major projects had entered service in 2016 and severe winter weather reduced well connections.
- Beginning in 2017, the former energy services business was no longer presented as discontinued operations because its remaining results and financial position were not material.
- Adoption of ASU 2016-09 increased beginning retained earnings and deferred tax assets by approximately $73 million for previously unrecognized excess tax benefits related to share-based compensation.
Merger, Outlook, Risks and Unusual Items
On January 31, 2017, ONEOK and ONEOK Partners agreed to an all-stock merger under which ONEOK would acquire the publicly held ONEOK Partners units at an exchange ratio of 0.985 ONEOK share per unit. Closing was expected in late Q2 or early Q3 2017, subject to shareholder, unitholder and other customary approvals. The transaction would eliminate the public trading of ONEOK Partners units, leave existing debt outstanding, and result in expected guarantees of ONEOK and ONEOK Partners debt. Termination fees of up to $300 million could apply in specified circumstances.
In April 2017, ONEOK entered into a $2.5 billion revolving credit agreement that would become effective upon merger closing and replace the existing ONEOK and ONEOK Partners facilities. The company also amended the ONEOK Partners term loan agreement to add ONEOK as a guarantor upon closing.
Management expected approximately 90% of ONEOK Partners’ consolidated earnings to be fee-based in 2017. It expected growth in producer activity, volumes, and demand for midstream services from the STACK and SCOOP, Williston, and Permian basins. Additional ethane recovery, petrochemical demand, and NGL exports were expected to support results primarily in the second half of 2017.
ONEOK Partners projected 2017 capital expenditures of $520 million to $640 million, including $215 million to $260 million for Natural Gas Gathering and Processing, $215 million to $260 million for Natural Gas Liquids, $80 million to $105 million for Natural Gas Pipelines, and $10 million to $15 million for other expenditures. Phase II of the Bakken NGL Pipeline expansion was expected to cost approximately $100 million and be completed in Q3 2018; Phase III of Roadrunner was planned for 2019 at an estimated cost of $30 million to $40 million.
- Key operating risks include commodity-price and basis exposure, volumetric declines, ethane rejection, severe weather, producer drilling activity, operating outages, and counterparty credit risk.
- Environmental, pipeline safety, permitting, regulatory, and rate matters could require additional spending or interrupt operations.
- Higher interest rates, credit-rating downgrades, limited access to capital markets, or increased collateral requirements could raise financing costs and pressure liquidity.
- ONEOK Partners expected to repay its $400 million of 2.0% senior notes due October 2017 using cash and short-term borrowings.
- Two putative class actions filed in March and April 2017 allege that the ONEOK Partners merger proxy statement was materially incomplete or misleading. The defendants intend to defend the claims, but the outcome and potential effect on the merger could not be predicted.
- The Sinclair gas-index litigation resulted in summary judgment for the company’s affiliate; an appeal remained possible, although management expected any future charges to be immaterial.
- A $20 million noncash contribution of Series E preferred stock to the ONEOK Foundation in April 2017 was expected to be recorded as an expense in Q2 2017.
Facts Investors Should Verify
- Whether the ONEOK–ONEOK Partners merger closed as expected and the resulting share issuance, ownership structure, guarantees, and consolidated leverage.
- Actual 2017 capital expenditures versus the $520 million–$640 million projection and the funding mix used.
- Progress in STACK, SCOOP, Williston, and Permian volumes, plant connections, ethane recovery, and NGL export demand.
- ONEOK Partners’ ability to refinance or repay the October 2017 debt maturity while maintaining investment-grade ratings and commercial-paper access.
- Whether the merger-related litigation or other legal, environmental, pipeline-safety, or regulatory matters produce material costs or delays.
- Changes in commodity prices, hedging positions, interest rates, counterparty credit quality, and required collateral.
- Whether operating cash flow supports distributions, dividends, debt service, and planned capital spending without materially increasing leverage.