ONEOK, Inc. 2015 Form 10-K Summary
Business context and reporting period
ONEOK reported fiscal-year results for the year ended December 31, 2015. The company is primarily a holding company and the sole general partner of ONEOK Partners, L.P., owning a 41.2% interest at year-end. Operations consist of natural gas gathering and processing, natural gas liquids, and natural gas pipelines. The former natural gas distribution business was separated into ONE Gas in January 2014, and the former energy services business was wound down in March 2014; both are reported as discontinued operations.
Financial performance and key metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Total revenue | $7.763 billion | $12.195 billion | Down 36% |
| Service revenue | $1.665 billion | $1.470 billion | Up 13% |
| Operating income | $996.2 million | $1.144 billion | Down 13% |
| Income from continuing operations | $385.3 million | $668.7 million | Down 42% |
| Net income attributable to ONEOK | $245.0 million | $314.1 million | Down 22% |
| Diluted EPS from continuing operations | $1.19 | $1.52 | Down 22% |
| Operating cash flow | $1.007 billion | $1.286 billion | Down 22% |
| Capital expenditures | $1.188 billion | $1.779 billion | Down 33% |
Reported operating margin was approximately 12.8%, compared with approximately 9.4% in 2014. The improvement in the reported margin largely reflects the sharp reduction in commodity sales and corresponding cost of sales; operating income nevertheless declined because of lower commodity-related earnings, higher depreciation, increased operating costs, and impairment charges. Net income attributable to ONEOK represented approximately 3.2% of revenue.
- Natural Gas Gathering and Processing operating income declined 72% to $78.2 million, primarily because of lower realized NGL, natural gas and condensate prices and impairment charges.
- Natural Gas Liquids operating income increased 11% to $767.3 million, supported by higher fee-based exchange-services and transportation earnings, including the West Texas LPG system.
- Natural Gas Pipelines operating income declined 15% to $153.0 million, mainly due to lower storage and park-and-loan activity after unusually cold weather in early 2014.
- ONEOK Partners paid distributions of $3.16 per unit in 2015, and distributions to ONEOK totaled $706.3 million.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $97.6 million at December 31, 2015, compared with $172.8 million at year-end 2014.
- Consolidated long-term debt, including current maturities, was $8.434 billion, compared with $7.161 billion. ONEOK separately reported approximately $1.6 billion of indebtedness, while ONEOK Partners reported approximately $7.3 billion.
- ONEOK had $298.9 million available under its $300 million revolving credit facility, no borrowings under that facility, and a debt-to-Consolidated EBITDA ratio of 2.3x.
- ONEOK Partners had approximately $1.8 billion available under its $2.4 billion revolving credit facility, $246.3 million of commercial paper outstanding, and $300 million drawn under the credit agreement. Its debt-to-adjusted-EBITDA ratio was 4.4x, within the 5.0x covenant.
- ONEOK issued $500 million of 7.5% senior notes due 2023 and used the proceeds, together with cash, to purchase $650 million of additional ONEOK Partners common units.
- ONEOK Partners issued $800 million of senior notes and approximately $749 million of common units in 2015. Its ownership interest increased from 37.8% to 41.2%.
- ONEOK Partners entered into a $1.0 billion term loan in January 2016 to refinance its 2016 debt maturities. The filing identifies $1.1 billion of ONEOK Partners debt maturities in 2016.
Material changes versus the prior comparable period
- Commodity prices fell sharply: average WTI declined to approximately $50 per barrel from $93, NYMEX natural gas to approximately $2.60 per MMBtu from $4.30, and Conway propane to below $0.41 per gallon from above $1.10.
- Commodity sales declined 43%, but service revenue increased 13% as the business shifted toward fee-based contracts.
- Natural gas gathered volumes increased to 1,932 BBtu/d from 1,733 BBtu/d, processed volumes increased to 1,687 BBtu/d from 1,534 BBtu/d, and NGL sales increased to 129 MBbl/d from 104 MBbl/d.
- The Natural Gas Gathering and Processing segment restructured significant POP contracts. Its average fee rate increased to $0.44 per MMBtu for 2015 from $0.36, with fourth-quarter fees averaging $0.55 per MMBtu.
- ONEOK Partners recorded $264.3 million of noncash impairment charges in the fourth quarter, primarily involving Powder River Basin dry-gas assets and equity investments. The company expects to cease operating its wholly owned coal-bed methane gathering system in 2016.
- Capital spending was reduced, and certain processing and NGL infrastructure projects were suspended in response to lower producer activity and commodity prices.
- Cash flow from operations was below ONEOK Partners’ cash distributions for the full year, requiring use of operating cash, commercial paper, and distributions from equity-method investments to fund distributions.
Guidance, outlook, risks and unusual items
- Management expects low commodity prices to persist through 2016 and does not expect a near-term return to early-2014 price levels.
- Management expects fee-based earnings to exceed 75% of Natural Gas Gathering and Processing earnings and approximately 85% on a consolidated ONEOK Partners basis in 2016.
- Management expects 2016 ONEOK Partners capital expenditures of approximately $600 million: $355 million for Natural Gas Gathering and Processing, $125 million for Natural Gas Liquids, $100 million for Natural Gas Pipelines, and $20 million for other projects.
- Management expects 2016 cash flow to improve as recently completed projects increase volumes and restructured contracts provide higher fee revenue. It does not expect to need public debt or equity issuance in 2016 and well into 2017, although market access may be used if prudent.
- Ethane rejection exceeded 150 MBbl/d on the NGL system during 2015 and is expected to remain a significant headwind into 2017. Increased petrochemical demand is expected beginning in 2017.
- Roadrunner Phase I was expected to enter service in the first quarter of 2016, with Phase II expected in the first quarter of 2017. The project is supported by 25-year firm demand-charge contracts and is nonrecourse to ONEOK and ONEOK Partners.
- ONEOK paid $2.43 per share in 2015, up 14% from $2.125 in 2014, and declared a $0.615 quarterly dividend in January 2016.
- Material risks include sustained commodity-price weakness, lower producer drilling and volumes, customer credit deterioration, high leverage and refinancing needs, rising financing costs, ethane rejection, regulatory and environmental compliance, pipeline and operational incidents, impairment risk, cybersecurity, and pending gas-index pricing litigation.
- The gas-index pricing litigation was remanded for further proceedings after the U.S. Supreme Court affirmed the Ninth Circuit. ONEOK stated that potential exposure cannot reasonably be estimated and that future charges could be material.
Most important facts for investors to verify
- Whether ONEOK Partners’ increased fee-based contract mix and hedging materially offset continuing commodity-price and volume pressure.
- Progress, cost, subscriptions, and financing for Roadrunner, WesTex, Bear Creek, Stateline, and other remaining growth projects.
- ONEOK Partners’ ability to fund distributions while maintaining leverage within credit-agreement covenants, particularly after 2016 debt maturities.
- The effect of continued ethane rejection, producer drilling reductions, and potential additional impairments in the Powder River Basin and other assets.
- The ultimate exposure and timing of the gas-index pricing litigation.
- Whether the planned $600 million 2016 capital program and expected cash-flow improvement are achieved.