ONEOK, Inc. 2009 Form 10-K Summary
Business context and reporting period
ONEOK reported fiscal-year results for the year ended December 31, 2009; the filing also provides unaudited fourth-quarter data. The company operates through ONEOK Partners, Distribution and Energy Services. ONEOK was the sole general partner of ONEOK Partners and owned 45.1% at December 31, 2009; following ONEOK Partners’ February 2010 unit offering, its aggregate equity interest declined to approximately 42.8%.
- ONEOK Partners: Natural-gas gathering, processing, transportation, storage and NGL gathering, fractionation, transportation and marketing.
- Distribution: Regulated natural-gas utilities serving more than two million customers in Oklahoma, Kansas and Texas.
- Energy Services: Wholesale and retail natural-gas marketing, storage, transportation and risk-management services.
Financial performance and key metrics
| Metric | 2009 | 2008 | Change |
|---|---|---|---|
| Revenue | $11.112 billion | $16.157 billion | Down 31% |
| Net margin | $2.016 billion | $1.936 billion | Up 4% |
| Operating income | $894.6 million | $917.0 million | Down 2% |
| Net income | $491.2 million | $600.5 million | Down 18% |
| Net income attributable to ONEOK | $305.5 million | $311.9 million | Down 2% |
| Diluted EPS | $2.87 | $2.95 | Down 3% |
| Operating cash flow | $1.453 billion | $475.7 million | Up $977.0 million |
| Capital expenditures | $791.2 million | $1.473 billion | Down 46% |
Revenue declined primarily because natural-gas, crude-oil and NGL prices were substantially lower than in 2008. Net margin increased because stronger Energy Services and Distribution margins more than offset lower ONEOK Partners commodity-related margins. Approximate consolidated margins were 18.1% for net margin, 8.1% for operating income and 2.7% for net income attributable to ONEOK, based on reported revenue.
Fourth-quarter 2009 revenue was $3.729 billion, net margin was $580.3 million, operating income was $273.1 million, net income was $144.0 million and net income attributable to ONEOK was $93.4 million. Diluted quarterly EPS was $0.87.
Segment performance and material changes
- ONEOK Partners: Revenue declined 16% to $6.475 billion, net margin declined 2% to $1.119 billion and operating income declined 15% to $546.6 million. Lower realized commodity prices and narrower NGL price differentials reduced margin, while higher processed gas and NGL volumes, the Guardian expansion, Overland Pass-related projects and the Arbuckle Pipeline provided partial offsets.
- Distribution: Net margin rose 5% to $716.0 million and operating income rose 11% to $209.8 million, supported by capital-recovery mechanisms, revenue riders and other regulatory initiatives. Delivered volumes fell 6% to 371.6 Bcf, partly because of warmer weather, but weather-normalization mechanisms moderated the earnings impact.
- Energy Services: Revenue declined 53% to $3.596 billion, while net margin rose 60% to $177.6 million and operating income rose 79% to $135.3 million. Transportation, premium services, storage and marketing margins improved, including favorable hedge and mark-to-market effects.
- ONEOK Partners placed the Guardian Pipeline expansion and extension, Williston Basin processing expansion, Arbuckle Pipeline and D-J Basin and Piceance laterals into service during 2009.
- ONEOK Partners issued $500 million of 8.625% senior notes due 2019 and raised approximately $241.6 million through a common-unit offering. The proceeds were primarily used to repay credit-agreement borrowings.
Cash flow, debt and liquidity
- Operating cash flow of $1.453 billion exceeded capital expenditures of $791.2 million, although financing cash flows were negative $1.146 billion because of debt repayments, dividends and distributions.
- Cash and cash equivalents declined to $29.4 million at year-end from $510.1 million in 2008.
- Total long-term debt, including current maturities, was $4.602 billion at December 31, 2009, compared with $4.231 billion in 2008. ONEOK separately reported approximately $1.9 billion of borrowed-money indebtedness excluding ONEOK Partners’ debt.
- ONEOK had $358.9 million of commercial paper outstanding, $37.0 million of letters of credit and $804.1 million of available capacity under its credit agreement, which expires in July 2011.
- ONEOK Partners had $523 million outstanding under its $1.0 billion credit agreement, approximately $367.1 million of borrowing capacity under covenant limitations and $3.2 million of cash. Its credit agreement expires in March 2012.
- ONEOK and ONEOK Partners remained investment grade at Moody’s Baa2 and S&P BBB, each with a stable outlook. ONEOK’s standalone debt-to-capital ratio was 45.4%; ONEOK Partners’ indebtedness-to-adjusted-EBITDA ratio was 4.5 to 1, within its 5.0-to-1 covenant.
Guidance, outlook, risks and unusual items
Management expected a moderate economic recovery in 2010, improved credit markets and a better commodity-price environment than in 2009, while warning that inflation could increase the cost of capital. Planned 2010 capital expenditures were approximately $603 million, including $362 million for ONEOK Partners, $217 million for Distribution and $24 million for other activities.
- Key risks include commodity-price and NGL-spread volatility, weather sensitivity, counterparty credit exposure, competition, access to capital, regulatory rate recovery, pipeline integrity, construction execution and environmental compliance.
- Energy Services requires substantial working capital for gas inventory, storage and transportation capacity and collateral. Inventory-related working capital reached $684.8 million during 2009 and was $264.0 million at year-end; counterparty margin requirements ranged from zero to $107.7 million.
- ONEOK Partners had $250 million of senior notes due in 2010 and $225 million due in 2011. Certain notes contain rating-related repurchase provisions if investment-grade ratings are lost.
- Natural gas in storage was written down by $308.5 million in 2008; the comparable 2009 inventory adjustment was $11.3 million.
- The company disclosed ongoing gas-index pricing litigation and other legal proceedings, but stated that the ultimate outcomes were not expected to have a material adverse effect on consolidated results, financial position or liquidity.
- Environmental expenditures had not materially affected earnings or cash flow. Proposed greenhouse-gas, air-quality and other regulatory changes could increase future capital and operating costs, although management did not expect the identified RICE NESHAP expenditures to be material.
- No goodwill, long-lived-asset or unconsolidated-affiliate impairment charges were recorded in 2009.
Most important facts for investors to verify
- Whether lower commodity prices or improved volumes and fee-based earnings drive ONEOK Partners’ future margin and distributions.
- The sustainability of the Distribution segment’s regulatory recoveries, rate mechanisms and weather protections.
- ONEOK Partners’ ability to refinance the 2010–2012 debt maturities while maintaining investment-grade ratings and covenant compliance.
- Actual 2010 capital spending versus the $603 million plan and the operating performance of recently completed projects.
- Cash flow available to ONEOK after ONEOK Partners distributions, dividends, debt service, pension contributions and Energy Services collateral requirements.
- Potential exposure from pending litigation, environmental obligations, greenhouse-gas regulation and proposed Kansas “ring-fencing” requirements.