ONEOK, Inc. 2012 Third-Quarter Form 10-Q Summary
Business context and reporting period
ONEOK, Inc. filed its unaudited quarterly report for the three and nine months ended September 30, 2012. The company operates through ONEOK Partners, a consolidated midstream master limited partnership; Natural Gas Distribution, its regulated utilities serving more than 2 million customers; and Energy Services, which markets natural gas and provides risk-management services. ONEOK owned a 43.4% economic interest in ONEOK Partners at quarter-end while retaining control through its general-partner interest.
Results are affected by seasonality and are not necessarily indicative of full-year performance. Prior-period results were recast for the February 2012 sale of ONEOK Energy Marketing Company, which is reported as discontinued operations. A two-for-one stock split completed in June 2012 is reflected in all share and per-share amounts.
Financial performance and key metrics
| Metric | Q3 2012 | Q3 2011 | 9M 2012 | 9M 2011 |
|---|---|---|---|---|
| Revenue | $3.029 billion | $3.529 billion | $8.973 billion | $10.735 billion |
| Net margin | $554.0 million | $532.6 million | $1.747 billion | $1.681 billion |
| Operating income | $242.9 million | $249.3 million | $802.9 million | $793.9 million |
| Net income | $165.0 million | $160.9 million | $547.7 million | $495.0 million |
| Net income attributable to ONEOK | $65.2 million | $60.3 million | $249.1 million | $245.6 million |
| Diluted EPS | $0.31 | $0.28 | $1.18 | $1.14 |
| Capital expenditures | $458.2 million | $338.5 million | $1.239 billion | $862.3 million |
Net-margin percentage was approximately 18.3% in Q3 2012 versus 15.1% in Q3 2011, while operating margin was approximately 8.0% versus 7.1%. For the nine-month period, net-margin percentage was approximately 19.5% versus 15.7%, and operating margin was approximately 8.9% versus 7.4%.
Nine-month operating cash flow was $762.9 million, down from $1.030 billion. Investing cash outflow was $1.199 billion, principally reflecting capital expenditures. Financing cash inflow was $1.340 billion, driven by debt and equity issuances. Cash and cash equivalents increased to $978.8 million from $66.0 million at December 31, 2011; this consolidated balance includes ONEOK Partners. ONEOK separately reported approximately $15.2 million of cash at September 30, 2012.
At September 30, 2012, consolidated current assets were $2.956 billion and current liabilities were $2.439 billion. Consolidated long-term debt, including current maturities, was approximately $6.529 billion, compared with approximately $4.894 billion at year-end 2011. Consolidated debt represented 63% of capitalization, compared with 60% at year-end.
ONEOK had $676.7 million of commercial paper outstanding, no revolver borrowings, approximately $521.4 million of available credit under its $1.2 billion revolving facility and a 50.9% stand-alone debt-to-capital ratio for covenant purposes. ONEOK Partners had no commercial paper or revolver borrowings, approximately $963.6 million of cash and $1.2 billion of available revolver capacity. Both entities were in compliance with their financial covenants.
Material changes versus the prior comparable period
- Revenue declined 14% in the quarter and 16% year to date, primarily because of lower natural gas and NGL prices. Higher volumes and favorable NGL differentials partly offset the price impact.
- Net margin increased 4% in both the quarter and nine-month period. ONEOK Partners benefited from higher gathering, processing and NGL volumes, completed growth projects and higher fees.
- ONEOK Partners operating income increased 2% in Q3 and 18% year to date, despite lower prices. Its nine-month capital expenditures increased 53% to $1.012 billion.
- Energy Services deteriorated materially: nine-month net margin fell to a loss of $43.1 million from income of $48.1 million, and operating income fell to a loss of $67.6 million from income of $29.2 million. Lower storage, transportation and marketing margins reflected narrower price differentials, lower volatility and reduced capacity utilization.
- Natural Gas Distribution nine-month operating income declined 5% to $136.2 million. Warmer weather, expiration of an Oklahoma integrity-management rider and higher operating costs offset new rates and weather-normalization mechanisms.
- The company recorded a $10.3 million first-quarter goodwill impairment in Energy Services. It also reclassified $29.9 million of deferred hedge losses into nine-month earnings because forecasted inventory economics no longer supported deferral.
- ONEOK issued $700 million of 4.25% senior notes due 2022. ONEOK Partners issued $1.3 billion of senior notes and completed equity issuances generating approximately $920 million of net proceeds, increasing ONEOK’s ownership interest from 42.8% to 43.4%.
- ONEOK completed a $150 million accelerated share repurchase of approximately 3.4 million shares. The quarterly dividend increased to $0.33 per share, and the declared ONEOK Partners distribution increased to $0.685 per unit.
Guidance, outlook, commentary and risks
- Management projected 2012 capital expenditures of approximately $2.182 billion: $1.868 billion for ONEOK Partners, $282 million for Natural Gas Distribution and $32 million for other activities.
- ONEOK Partners expected to invest approximately $5.7 billion to $6.6 billion in growth projects from 2011 through 2015, emphasizing fee-based gathering, processing, pipeline and NGL infrastructure. Projects include the Bakken Crude Express Pipeline, Bakken NGL Pipeline, Stateline and Garden Creek processing facilities, Sterling III, MB-2 and MB-3 fractionators, and other NGL infrastructure.
- Management expected continued producer development in the Bakken and Mid-Continent regions to support volume growth, but noted increasing commodity-price exposure under percentage-of-proceeds contracts.
- Energy Services was restructuring its leased storage and transportation portfolio to reduce fixed costs and working-capital requirements. Further contract-renegotiation or termination charges could affect future earnings.
- Northern Border Pipeline filed a proposed rate settlement that, if approved by FERC, would reduce long-term transportation rates by approximately 11% beginning in January 2013 and could reduce future equity earnings.
- Key risks include natural gas and NGL price volatility, narrowing location and seasonal differentials, lower market volatility, counterparty and credit risk, weather, producer drilling activity, capacity constraints, project execution, regulatory approvals, pipeline integrity, environmental compliance and access to capital markets.
- Environmental and pipeline-safety regulations may require additional capital and operating expenditures. The company stated that currently anticipated costs were not expected to be material, but certain potential costs remain unknown.
- All long-term debt was at fixed interest rates at September 30, 2012. ONEOK and ONEOK Partners maintained investment-grade ratings of Baa2/BBB with stable outlooks.
- Disclosure controls and procedures were effective at quarter-end, and management reported no material changes in internal control over financial reporting.
Most important facts for investors to verify
- Whether ONEOK Partners’ substantial growth-capital program remains on schedule and within the projected $2.182 billion 2012 spending plan.
- The effect of lower natural gas and NGL prices, narrowing differentials and increased percentage-of-proceeds exposure on future ONEOK Partners margins.
- Whether Energy Services can improve from its nine-month operating loss and whether additional storage or transportation contract charges will be recorded.
- The sustainability of cash flow after $1.239 billion of nine-month capital expenditures, dividends, distributions and increased consolidated debt.
- Approval and financial impact of the Northern Border Pipeline rate settlement and pending state utility-rate proceedings.
- Potential collateral requirements, liquidity effects and earnings volatility from commodity derivatives if credit ratings decline or market prices move materially.
- Future environmental, pipeline-safety and Dodd-Frank compliance costs, which the filing states cannot be estimated clearly in all cases.