ONEOK, Inc. Form 10-Q Summary
Reporting period: Three months ended March 31, 2012; filed May 2, 2012. The unaudited consolidated results include ONEOK Partners, which ONEOK controlled through its general-partner interest and owned 43.4% at March 31, 2012. The business comprises ONEOK Partners, Natural Gas Distribution and Energy Services. Results are seasonal and are not necessarily indicative of full-year performance.
Financial Results and Key Metrics
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Revenue | $3.415 billion | $3.761 billion | Down 9% |
| Net margin | $643.6 million | $629.9 million | Up 2% |
| Operating income | $325.9 million | $328.3 million | Down 1% |
| Net income | $233.5 million | $199.3 million | Up 17% |
| Net income attributable to ONEOK | $122.9 million | $130.1 million | Down 6% |
| Diluted earnings per share | $1.16 | $1.19 | Down $0.03 |
| Operating cash flow | $426.1 million | $647.8 million | Down $221.7 million |
| Capital expenditures | $348.4 million | $194.7 million | Up 79% |
| Dividends declared per share | $0.61 | $0.52 | Up $0.09 |
Consolidated cash and cash equivalents were $781.2 million at March 31, 2012, versus $66.0 million at December 31, 2011. Cash provided by financing activities of $594.7 million, including debt and ONEOK Partners equity issuances, more than offset operating and investing cash uses. Cash used in investing activities was $314.4 million, primarily reflecting growth capital expenditures.
Total assets were $14.252 billion and total equity was $4.379 billion at March 31, 2012. Current liabilities were $2.600 billion, long-term debt excluding current maturities was $5.226 billion, and current maturities of long-term debt were $364.4 million. The estimated fair value of consolidated long-term debt, including current maturities, was $6.3 billion versus a $5.6 billion carrying value.
Segment Performance and Material Changes
- ONEOK Partners: Operating income increased 44% to $256.0 million, while net margin increased 28% to $421.1 million. Higher NGL volumes, favorable NGL price differentials, increased Williston Basin and western Oklahoma activity, and the Garden Creek plant supported results. Capital expenditures rose 94% to $280.8 million.
- Natural Gas Distribution: Operating income declined 4% to $98.8 million and net margin declined 3% to $237.3 million. Warmer weather reduced transportation volumes, and an Oklahoma pipeline-integrity recovery mechanism expired, partially offset by new Texas rates and rider recoveries.
- Energy Services: The segment reported an operating loss of $30.7 million versus operating income of $47.8 million. Net margin fell to negative $15.4 million from positive $55.9 million, driven by narrower storage and transportation spreads, lower market volatility, lower seasonal price differentials, capacity-release losses and a $10.3 million goodwill impairment charge.
- Discontinued operations: ONEOK sold its retail natural gas marketing business on February 1, 2012, for $22.5 million plus working capital. Net proceeds were approximately $32.0 million, and the company recognized a $13.3 million after-tax gain. Prior periods were recast.
- ONEOK Partners ownership and financing: In March 2012, ONEOK Partners issued common units generating approximately $460 million of net proceeds and sold additional units to ONEOK for approximately $460 million. ONEOK’s ownership increased to 43.4% from 42.8%. Proceeds supported debt repayment and capital expenditures.
Debt, Liquidity and Outlook
- ONEOK issued $700 million of 4.25% senior notes due 2022 in January 2012. Net proceeds of approximately $694 million were used primarily to repay commercial paper.
- At March 31, 2012, ONEOK had $419.8 million of commercial paper outstanding, $2.0 million of letters of credit and approximately $778.2 million of available capacity under its $1.2 billion revolving credit agreement. Its stand-alone debt-to-capital ratio under the credit agreement was 47.1%, below the 67.5% covenant limit.
- ONEOK Partners had no commercial paper, letters of credit or revolver borrowings and approximately $746.7 million of cash and $1.2 billion of available revolver capacity. Its indebtedness-to-adjusted-EBITDA ratio was 2.6 to 1, within covenant limits.
- Both ONEOK and ONEOK Partners were rated investment grade with stable outlooks: Moody’s Baa2 and S&P BBB. Management expected operating cash flow, available capital resources and ONEOK Partners distributions to fund operations, planned capital spending and the remaining stock-repurchase program.
- Projected 2012 capital expenditures were $2.271 billion, including $1.969 billion for ONEOK Partners, $270 million for Natural Gas Distribution and $32 million for other activities.
- Management described approximately $4.7 billion to $5.6 billion of ONEOK Partners growth investments focused on gathering, processing, NGL infrastructure and fee-based earnings. Additional projects announced in April 2012 included the $1.5 billion to $1.8 billion Bakken Crude Express Pipeline and other Williston Basin and Cana-Woodford projects.
Guidance, Risks, Contingencies and Unusual Items
- Management did not provide a consolidated earnings guidance figure in the filing. It stated that results depend on commodity prices, weather, market differentials, production growth, project execution, regulatory approvals and access to capital.
- An unexpected brine and propane release at a Medford, Oklahoma, storage well caused a 10-day operational disruption beginning February 28, 2012. ONEOK Partners estimated that net margin would have been approximately $10 million higher absent the disruption; related costs were not expected to be material.
- Energy Services remains exposed to reduced storage and transportation margins because of increased natural gas supply, narrower location and seasonal price differentials and low volatility. Further contract renegotiations or capacity reductions could result in additional earnings charges.
- Commodity, interest-rate, counterparty and credit-rating risks remain material. A downgrade below investment grade could increase collateral requirements; the filing estimated potential additional collateral of approximately $6.8 million for certain derivative positions at March 31, 2012.
- Environmental, pipeline-safety, greenhouse-gas, air-emissions and Dodd-Frank requirements could increase operating or capital costs. The filing states that potential costs for certain proposed or evolving requirements were unknown.
- Legal proceedings arose in the ordinary course of business. Management could not reasonably estimate possible losses but did not expect the probable outcomes to materially affect consolidated results, financial position or cash flows.
- ONEOK settled $700 million of interest-rate swaps when it issued the 2022 notes and recorded a $44.1 million loss in accumulated other comprehensive income to be amortized to interest expense over the debt term.
- Management reported effective disclosure controls and procedures and no material changes to internal control over financial reporting during the quarter.
Investor Verification Points
- Verify the sustainability of ONEOK Partners’ higher NGL-driven margins and the funding, permitting and execution risks associated with its substantial growth-capital program.
- Assess whether Energy Services’ storage and transportation economics are stabilizing and whether additional contract-renegotiation or goodwill-impairment charges may occur.
- Reconcile consolidated cash with parent-only liquidity: the consolidated balance sheet reported $781.2 million of cash, while the MD&A identified approximately $34.5 million of ONEOK standalone cash.
- Monitor leverage, commercial-paper access, credit ratings, covenant compliance and the availability of revolving credit facilities.
- Evaluate the effect of commodity prices, NGL and natural-gas differentials, weather and hedging-accounting reclassifications on future earnings and cash flow.
- Track regulatory rate proceedings, pipeline-safety requirements, environmental obligations and potential Dodd-Frank compliance costs.
- Confirm shareholder approval and implementation details for the proposed two-for-one ONEOK common-stock split.