ONEOK, Inc. 2014 Second-Quarter Form 10-Q Summary
Business context and reporting period
ONEOK filed its unaudited Form 10-Q for the quarter and six months ended June 30, 2014. Following the January 31, 2014 separation of ONE Gas and the March 31, 2014 wind-down of its energy services business, continuing operations primarily consist of ONEOK’s 38.5% ownership interest in ONEOK Partners, which operates natural gas gathering and processing, natural gas liquids and natural gas pipelines businesses.
ONEOK consolidated ONEOK Partners but was generally restricted to its distributions and other permitted cash flows. Prior periods were recast to reflect the discontinued operations and revised reportable segments.
Financial results and key metrics
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Total revenues | $3.067 billion | $2.769 billion | $6.230 billion | $5.287 billion |
| Net margin | $495.5 million | $412.8 million | $1.006 billion | $783.9 million |
| Operating income | $251.3 million | $228.4 million | $545.4 million | $403.1 million |
| Income from continuing operations | $148.8 million | $153.8 million | $353.5 million | $264.3 million |
| Net income attributable to ONEOK | $61.6 million | $0.9 million | $155.1 million | $113.4 million |
| Diluted EPS | $0.29 | — | $0.74 | $0.54 |
| Cash flow from operating activities | Not separately presented | Not separately presented | $536.3 million | $788.3 million |
| Capital expenditures | $392.7 million | $559.3 million | $822.2 million | $1.060 billion |
Q2 net margin was approximately 16.2% of revenue versus 14.9% in the prior-year quarter. Operating margin was approximately 8.2% in both periods. Six-month net margin was approximately 16.1% versus 14.8%, while operating margin improved to approximately 8.8% from 7.6%.
Commodity sales increased 11% in the quarter and 19% year to date, while services revenue increased 9% and 11%, respectively. Growth reflected higher volumes from completed projects, higher realized prices and wider NGL price differentials. Operating costs increased 37% in the quarter and 20% year to date, and depreciation and amortization increased 22% in both periods as the asset base expanded.
Liquidity, cash flow and capitalization
- Cash and cash equivalents were $358.6 million at June 30, 2014, compared with $145.6 million at December 31, 2013. Management reported approximately $80.5 million at ONEOK and $278.0 million at ONEOK Partners.
- Six-month operating cash flow was $536.3 million, down from $788.3 million, primarily because of the ONE Gas separation and unfavorable working-capital changes, including NGL inventory and commodity imbalances.
- Investing cash outflow was $820.5 million, principally for capital expenditures. Financing cash inflow was $493.9 million, aided by ONE Gas debt proceeds and ONEOK Partners equity issuance.
- Book long-term debt, including current maturities, was approximately $7.2 billion at June 30, 2014, versus $7.8 billion at year-end 2013; estimated fair value was approximately $8.0 billion.
- ONEOK had no commercial paper outstanding, approximately $297.9 million of availability under its $300 million revolving facility and a debt-to-Consolidated EBITDA ratio of 1.7x. ONEOK Partners had no commercial paper or revolver borrowings, approximately $1.7 billion of revolver availability and a debt-to-adjusted EBITDA ratio of 3.4x.
- ONEOK’s next long-term debt maturity was in 2022. ONEOK Partners’ capitalization was 51% debt and 49% equity at June 30, 2014.
- ONEOK Partners’ 2014 projected capital expenditures were $2.109 billion, including $1.214 billion for gathering and processing, $798 million for NGLs and $74 million for pipelines.
Material changes versus the prior comparable period
- ONE Gas was separated tax-free to shareholders on January 31, 2014. ONEOK received approximately $1.13 billion from ONE Gas debt proceeds, repaid commercial paper and retired approximately $552.5 million of long-term debt before maturity.
- The debt retirements generated a $24.8 million loss on extinguishment and additional interest expense from discontinued hedge accounting. ONEOK also recorded a $2.9 million write-off of deferred credit-agreement issuance costs.
- The energy services business ceased operations by March 31, 2014. Remaining capacity-release obligations were $99.1 million at June 30, 2014, with approximately $60 million of future after-tax cash payments expected through 2023.
- ONEOK Partners issued approximately 13.9 million common units in May 2014 for net proceeds of approximately $714.5 million and sold approximately 3.0 million units through its at-the-market program during the first six months. ONEOK’s ownership declined to 38.5% from 41.2% at December 31, 2013.
- ONEOK Partners’ distribution increased to $0.76 per unit for the second quarter, from $0.72 in the comparable prior-year declaration. ONEOK declared a $0.575 quarterly dividend, compared with $0.36 per share in Q2 2013.
Outlook, commentary, risks and unusual items
- Management expects continued producer development in the Bakken, Powder River Basin, Cana-Woodford, SCOOP and other NGL-rich areas. ONEOK Partners expects approximately $7.0 billion to $7.5 billion of growth projects and acquisitions from 2010 through 2016.
- Ethane rejection is expected to persist through much of 2016 and may materially affect NGL volumes and results. New supply commitments and integrated assets are expected to partially mitigate the effect.
- Management expects narrower NGL location differentials, with intermittent volatility, as new pipelines and fractionation capacity enter service. This may reduce historical optimization margins and increase competition for supply.
- Commodity-price exposure is expected to rise as fee-based and percent-of-proceeds volumes expand. For the gathering and processing segment, management estimated that a $0.10 per MMBtu change in residue gas prices would affect annual net margin by approximately $4.6 million, before considering related operating or demand effects.
- Key risks include commodity-price volatility, producer drilling activity, ethane rejection, project execution and cost overruns, access to capital markets, interest rates, credit ratings, environmental and pipeline-safety regulation, counterparty performance and potential impairment of the Bighorn Gas Gathering investment.
- The Gas Index Pricing Litigation remains unresolved. The Supreme Court granted review on July 1, 2014; the company could not estimate potential exposure, but stated that future charges could be material.
- Environmental and pipeline-safety compliance costs are uncertain. Management generally does not expect currently identified requirements to have a material impact, but future rules or incidents could materially affect cash flow and results.
Important facts for investors to verify
- Whether ONEOK Partners’ major growth projects are completed on schedule and within the disclosed cost ranges.
- The persistence and financial effect of ethane rejection, NGL price differentials and commodity-price volatility.
- ONEOK Partners’ ability to fund approximately $2.109 billion of projected 2014 capital expenditures while maintaining leverage and distributions.
- The sustainability of ONEOK’s dividend, which depends substantially on distributions from ONEOK Partners.
- Progress and potential exposure in the Gas Index Pricing Litigation.
- Potential impairment of the $85.7 million Bighorn Gas Gathering investment, including $53.4 million of equity-method goodwill.
- Future environmental, methane-emissions and pipeline-safety requirements and their effect on capital spending.
- The effect of ONEOK Partners equity issuances and reduced ownership on ONEOK’s share of future earnings and cash distributions.