ONEOK, Inc. 2011 Form 10-K Summary
Business context and reporting period
ONEOK, Inc. filed its Annual Report on Form 10-K for the fiscal year ended December 31, 2011. The company operates through ONEOK Partners, Natural Gas Distribution and Energy Services. ONEOK owns 42.8% of ONEOK Partners and controls it as general partner. ONEOK Partners gathers, processes, transports, stores and markets natural gas and natural gas liquids; the regulated distribution businesses serve more than 2 million customers in Oklahoma, Kansas and Texas.
The filing is an annual report rather than a quarterly filing. Fourth-quarter 2011 continuing-operations income was $263.7 million, and net income attributable to ONEOK was $115.0 million.
Key financial metrics
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Revenue | $14.806 billion | $12.679 billion | 17% increase |
| Net margin | $2.380 billion | $2.062 billion | 15% increase |
| Operating income | $1.159 billion | $943 million | 23% increase |
| Net income | $760 million | $541 million | 40% increase |
| Net income attributable to ONEOK | $361 million | $335 million | 8% increase |
| Income from continuing operations attributable to ONEOK | $358 million | $333 million | 7% increase |
| Diluted EPS, continuing operations | $3.34 | $3.09 | 8% increase |
| Diluted EPS, total | $3.36 | $3.10 | 8% increase |
| Operating cash flow | $1.360 billion | $834 million | 63% increase |
| Capital expenditures | $1.336 billion | $583 million | 129% increase |
| Cash and cash equivalents | $66 million | $30 million | Increase |
| Total assets | $13.697 billion | $12.499 billion | 10% increase |
| Long-term debt, including current maturities | $4.894 billion | $4.330 billion | 13% increase |
Approximate consolidated margins were 16.1% for net margin, 7.8% for operating income and 2.4% for net income attributable to ONEOK, based on reported revenue. ONEOK’s stand-alone capital structure, excluding ONEOK Partners debt, was 45% debt and 55% equity at year-end.
- ONEOK Partners: Revenue increased 31% to $11.323 billion, net margin increased 38% to $1.577 billion, and operating income increased 60% to $940 million. Capital expenditures were $1.063 billion.
- Natural Gas Distribution: Net margin was essentially unchanged at $752 million, while operating income declined 12% to $198 million as operating costs increased. The segment served approximately 2.090 million customers.
- Energy Services: Net margin declined 70% to $49 million and operating income declined 82% to $24 million, reflecting narrower natural gas location and seasonal price differentials, lower volatility and reduced transportation and storage optimization opportunities.
Material changes versus the prior comparable period
- ONEOK Partners benefited from higher NGL volumes, higher NGL and condensate prices, and substantially more favorable Conway-to-Mont Belvieu NGL price differentials. Equity earnings from investments rose 25% to $127 million.
- Natural gas gathered by ONEOK Partners declined to 1,030 BBtu/d from 1,067 BBtu/d, but natural gas processed increased to 713 BBtu/d from 674 BBtu/d. NGL sales increased to 497 MBbl/d from 457 MBbl/d.
- ONEOK Partners’ natural gas transportation margins declined because increased supply narrowed location differentials and reduced certain contracted and interruptible volumes.
- Natural Gas Distribution operating income declined because net margin was flat while labor, incentive compensation, health benefits, pension expense and other operating costs increased. Customer count increased modestly, but delivered volumes declined primarily because of warmer weather.
- Energy Services reduced leased transportation capacity and related costs, but the cost reductions did not offset the decline in transportation, storage, marketing, premium-services and financial-trading margins. The segment recorded a $91.1 million lower-of-cost-or-market inventory adjustment, with associated deferred hedge gains reclassified into earnings.
- Capital spending more than doubled, driven primarily by ONEOK Partners growth projects in gathering, processing, NGL fractionation and transportation.
- ONEOK repurchased approximately 4.3 million shares for $300 million under its $750 million three-year repurchase program. Dividends paid increased to $2.16 per share from $1.82.
- ONEOK Partners completed a two-for-one unit split in July 2011. A two-for-one ONEOK stock split was authorized in February 2012, subject to shareholder approval.
Liquidity, debt and cash flow
- Operating cash flow was $1.360 billion, compared with $1.371 billion used in investing activities, primarily because of growth-project capital expenditures.
- At December 31, 2011, ONEOK had $842 million of commercial paper outstanding, approximately $31 million of cash and approximately $356 million of available capacity under its $1.2 billion revolving credit facility.
- ONEOK Partners had no commercial paper, letters of credit or revolver borrowings outstanding and had approximately $35 million of cash and $1.2 billion of available revolver capacity.
- ONEOK and ONEOK Partners were in compliance with their credit agreement covenants. ONEOK’s stand-alone debt-to-capital ratio was 44.4% for covenant purposes; ONEOK Partners’ indebtedness-to-adjusted-EBITDA ratio was 2.9 to 1.
- ONEOK’s credit ratings were investment grade: Moody’s Baa2 and S&P BBB, both with stable outlooks. ONEOK Partners had the same ratings.
- ONEOK Partners had approximately $350 million of senior notes maturing in April 2012. Management expected to repay them with cash on hand and short-term borrowings.
- In January 2012, ONEOK issued $700 million of 4.25% senior notes due 2022. Net proceeds of approximately $694 million were used primarily to repay commercial paper.
- Management projected 2012 capital expenditures of $2.271 billion, including $1.969 billion for ONEOK Partners and $270 million for Natural Gas Distribution.
Guidance, outlook, management commentary, risks and unusual items
- Management expected rising production from the Bakken, Cana-Woodford, Granite Wash and Mississippian Lime areas, together with petrochemical and NGL export demand, to support ONEOK Partners’ growth projects and future earnings and cash flow.
- ONEOK Partners expected to invest approximately $2.7 billion to $3.3 billion in growth projects. Major projects included the Sterling III Pipeline, MB-2 fractionator, Bakken Pipeline, Bushton fractionator expansion and additional Mid-Continent infrastructure.
- Management expected Energy Services’ difficult environment to persist through 2012 and potentially into 2013 because of lower natural gas prices, reduced volatility and narrower location and seasonal differentials. Contract renegotiations or terminations could produce additional earnings charges.
- ONEOK Energy Marketing Company was classified as discontinued operations and sold to Constellation Energy for $22.5 million plus working capital on February 1, 2012. Management expected a first-quarter 2012 pretax gain of approximately $20 million to $23 million.
- Management expected cash from operations, existing resources, the January 2012 debt issuance and distributions from ONEOK Partners to fund operations, planned capital requirements and the remaining stock repurchase program.
- Key risks include commodity-price and basis risk, dependence on ONEOK Partners distributions, access to capital markets, leverage and refinancing, counterparty credit risk, weather sensitivity, competition, regulatory rate recovery, pipeline integrity, environmental compliance, greenhouse-gas requirements, hydraulic-fracturing regulation, construction execution and operational disruptions.
- Legal proceedings included gas measurement and gas-index-pricing litigation. The filing states that the probable outcomes of litigation and claims are not expected to have a material adverse effect, although certain appeals remained pending.
- Environmental expenditures had not been material through 2011, but potential costs associated with pipeline safety, air emissions, greenhouse gases and proposed regulations were not fully quantifiable.
- The company reported no goodwill, long-lived-asset or unconsolidated-affiliate impairment charges for 2011, 2010 or 2009. PricewaterhouseCoopers issued an unqualified audit opinion and concluded that internal control over financial reporting was effective.
Important facts for investors to verify
- Reconcile reported consolidated earnings with the portion attributable to ONEOK shareholders, given the substantial noncontrolling interest in ONEOK Partners.
- Assess whether ONEOK Partners’ large capital program generates the expected contracted volumes, returns and incremental distributions.
- Monitor ONEOK Partners’ ability to refinance or repay the $350 million April 2012 maturity and manage subsequent debt maturities.
- Evaluate the sustainability of NGL price differentials and the sensitivity of earnings to commodity prices, processing spreads and transportation capacity utilization.
- Track Energy Services contract reductions, potential termination or impairment charges, inventory valuation effects and mark-to-market volatility.
- Review the impact of the Energy Marketing Company sale, including the expected 2012 gain and the effect of discontinued-operations recasting.
- Confirm the regulatory recovery of distribution-system investments and pension and postretirement costs, including the $539.7 million of recorded regulatory assets.
- Review environmental, pipeline-safety, greenhouse-gas, derivative-market and litigation developments because several potential exposures remain difficult to quantify.