ONEOK, Inc. Form 10-Q Summary
Business context and reporting period
ONEOK, Inc. reported unaudited consolidated results for the three months ended March 31, 2013, compared with the three months ended March 31, 2012. Operations comprise ONEOK Partners, Natural Gas Distribution and Energy Services. ONEOK controlled ONEOK Partners and held a 43.3% ownership interest at March 31, 2013. Results are seasonal and the first quarter is not necessarily indicative of full-year performance.
Key financial metrics
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Revenue | $3.541 billion | $3.415 billion | Up 4% |
| Net margin | $623.5 million | $643.6 million | Down 3% |
| Operating income | $273.8 million | $325.9 million | Down 16% |
| Net income | $165.7 million | $233.5 million | Down 29% |
| Net income attributable to ONEOK | $112.5 million | $122.9 million | Down 8% |
| Diluted EPS | $0.54 | $0.58 | Down $0.04 |
| Operating cash flow | $471.5 million | $426.1 million | Up $45.4 million |
| Capital expenditures | $501.1 million | $348.4 million | Up 44% |
Net margin was approximately 17.6% of revenue, compared with 18.9% in the prior-year quarter. Operating margin was approximately 7.7%, compared with 9.5%. The filing does not present a consolidated EBITDA figure.
At March 31, 2013, total assets were $15.446 billion and total equity was $4.204 billion. Cash and cash equivalents were $143.9 million, compared with $583.6 million at December 31, 2012. Current liabilities were $2.337 billion, including $551.3 million of commercial paper. Long-term debt, including current maturities, was approximately $6.524 billion at book value; estimated fair value was $7.3 billion.
ONEOK had approximately $646.8 million of available capacity under its $1.2 billion revolving credit agreement after commercial paper and letters of credit. ONEOK's stand-alone debt-to-capital ratio was 49.3%, versus a 67.5% covenant limit. ONEOK Partners had no commercial paper, letters of credit or borrowings under its $1.2 billion facility and had approximately $1.2 billion of available credit. Both entities were in compliance with their respective covenants and had investment-grade ratings of Baa2/BBB with stable outlooks.
Cash used in investing activities was $494.8 million, primarily reflecting capital expenditures. Financing activities used $416.4 million, including debt repayment, dividends and distributions to noncontrolling interests. Cash decreased by $439.7 million during the quarter to $143.9 million.
Material changes versus the prior comparable period
- Revenue increased because of higher natural gas prices and higher volumes from completed ONEOK Partners projects, partly offset by lower NGL prices, narrower NGL location differentials and ethane rejection.
- ONEOK Partners net margin declined $50.5 million, or 12%, and operating income declined $78.3 million, or 31%. Optimization and marketing margins fell $89.8 million, largely because of narrower Conway-to-Mont Belvieu NGL differentials and reduced optimization capacity.
- ONEOK Partners benefited from volume growth, including higher Williston Basin activity and the Stateline I processing plant, but incurred higher operating, maintenance and depreciation costs from its expanding asset base.
- Natural Gas Distribution net margin rose 6% to $251.7 million, primarily from new rates and higher transportation volumes. Operating income increased 2% to $100.6 million.
- Energy Services net margin improved to $0.7 million from a $15.4 million loss. The prior-year period included a $29.9 million reclassification of deferred hedging losses and a $10.3 million goodwill impairment; no goodwill impairment was recorded in Q1 2013.
- Equity earnings declined 25% to $25.9 million. Northern Border Pipeline earnings were affected by transportation rates approximately 11% lower under a FERC-approved settlement, while Overland Pass Pipeline earnings were affected by ethane rejection.
- Capital expenditures increased substantially, primarily for ONEOK Partners gathering, processing and NGL projects. The filing projects 2013 capital expenditures of approximately $2.956 billion, including $2.640 billion for ONEOK Partners.
Guidance, outlook, commentary and risks
ONEOK Partners planned approximately $4.7 billion to $5.2 billion of growth capital investments from 2011 through 2015, including gathering, processing, fractionation and NGL pipeline projects. Management expected these projects to increase fee-based earnings and cash flow, supported by acreage dedications and supply commitments.
Management cautioned that continued excess natural gas supply, low volatility and narrow location and seasonal price differentials were reducing optimization opportunities. Ethane rejection reduced NGL volumes and margins in the first quarter; widespread and prolonged ethane rejection during 2013 could materially affect results. Management expected ethane rejection in 2014 to be less widespread and prolonged.
Energy Services was reducing leased transportation and storage capacity and allowing nonstrategic contracts to expire or be renegotiated. The filing states that future charges could result from contract terminations or renegotiations. Approximately 16% of transportation capacity and 2% of storage capacity expired by the end of 2013, with substantially more expiring by the end of 2015.
Material risks include commodity-price volatility, NGL price differentials, producer drilling and production levels, project construction costs and schedules, regulatory changes, pipeline integrity and environmental requirements, counterparty credit, financing and rating-agency actions, and potential impairment charges. Gas Index Pricing Litigation was remanded for further proceedings after Ninth Circuit decisions reversing summary judgments. ONEOK could not estimate potential exposure, but stated that future charges could be material.
The company also disclosed ongoing environmental and pipeline-safety obligations, potential additional costs from Dodd-Frank derivatives regulation, and a FERC rate review involving Viking Gas Transmission. Management stated that environmental expenditures and expected regulatory compliance costs were not material based on currently known requirements.
ONEOK declared a $0.36 per-share quarterly dividend, and ONEOK Partners declared a $0.715-per-unit quarterly distribution. No shares were repurchased during the quarter; approximately $300 million remained available under the stock-repurchase program, which was scheduled to terminate upon completion or December 31, 2013.
Important facts for investors to verify
- Whether NGL price differentials and ethane rejection continue to pressure ONEOK Partners margins and equity earnings.
- Progress, cost, financing and in-service timing for the approximately $2.956 billion 2013 capital program and the broader ONEOK Partners growth projects.
- ONEOK's consolidated leverage, commercial-paper dependence, available revolver capacity and covenant compliance.
- The sustainability of distributions from ONEOK Partners and ONEOK's ability to fund dividends, capital expenditures and potential share repurchases.
- The outcome and potential financial exposure from Gas Index Pricing Litigation and other regulatory or environmental matters.
- The effect of reduced Energy Services transportation and storage capacity, contract expirations and possible termination charges.
- Future impairment risk for equity-method investments and other assets exposed to commodity prices and producer activity.